Global oil prices slumped by over 8% on Monday after Iran’s military response to U.S. attacks on its nuclear facilities did not cause any fatalities or major damage, much to the relief of global crude markets.
Tehran’s threats to close the Strait of Hormuz, a key maritime artery for oil and gas shipments from the Persian Gulf out to the Gulf of Oman and beyond, have also come to naught so far. As of Monday, at the time of writing, satellite imagery suggests a normal passage of energy cargoes in the shipping lane.
At 16:34pm EDT on Monday, global proxy benchmark Brent’s front-month contract traded down 8.28% or $6.25 at $69.23 per barrel. Concurrently, the primary U.S. benchmark West Texas Intermediate’s front-month contract traded at $67.24 per barrel, down 8.84% or $6.60.
That’s after Iran launched an attack on Al-Udeid U.S. Air Force base, located near Qatar’s capital Doha. The base serves as the headquarters for the U.S. Central Command’s air operations in the Middle East, and hosts nearly 8,000 U.S. troops alongside rotational contingents of U.K. armed forces.
Fourteen missiles were launched by the Iranians on Monday to target the base. But no casualties or major damage was reported, as air defenses intercepted them, according to the Qatari government.
The attack was telegraphed in advance, mirroring what Iran did in 2020 when responding to the U.S. assassination of its Quds Force commander Qasem Soleimani.
After the attack, U.S. Republican Speaker of the House of Representatives Mike Johnson told the media: “I got a classified briefing on all this early this morning. This is the level of retaliation that was expected.”
Oil markets have taken the muted Iranian response as a cue for de-risking for now. More so, after Tehran’s seemingly unlikely threats to blockade the Strait of Hormuz have not been followed through even partially.
Oil futures, initially spiked after hostilities began in the Middle East late on June 13, as Israel launched a surprise attack on Iranian nuclear and military targets. Retaliatory responses by Iran have since resulted in a constant exchange of fire between both countries, including attacks on oil and gas facilities, prior to the U.S. involvement on Saturday.
Back To Market Fundamentals
Up until Monday’s market de-risking both Brent and WTI futures posted month-over-month gains of over 20%, sidestepping wider supply and demand fundamentals. Contingent upon the response of the U.S. and Israel on the way forward, those fundamentals are now seen returning to set the market’s tone.
Earlier this month, prior to the escalation of tensions in the Middle East, OPEC+, a select group of Russia-led oil producers and the Organization of the Petroleum Exporting Countries (OPEC) spearheaded by Saudi Arabia, opted to raise its collective production levels for July by another 411,000 barrels per day.
The move was the third consecutive output hike of 411,000 bpd announced by OPEC+. That too at a time when non-OPEC production remains elevated, with the U.S. currently the world’s largest oil producer pumping well north of 13 million bpd. Brazil, Canada, Guyana and Norway are also pumping more oil relative to last year.
Such a level of production may likely result in an oil market surplus given that global demand growth is thought to be less than 1 million bpd this year, according to the International Energy Agency.
That’s because this demand growth can be serviced by rising non-OPEC production alone. With expectations of a market surplus returning to the fore, oil prices may inevitably head lower as de-risking continues.
Disclaimer: The above commentary is meant to stimulate discussion based on the author’s opinion and analysis offered in a personal capacity. It is not solicitation, recommendation or investment advice to trade oil stocks, futures, options or products. Oil markets can be highly volatile and opinions in the sector may change instantaneously and without notice.