The impact of Iran-Israel tensions on oil prices: Sharp fluctuations observed

Israel's attack on the consulate building in Damascus on April 1, followed by Iran's response on April 13—the first time it had retaliated directly with hundreds of kamikaze drones, ballistic missiles, and cruise missiles without relying on regional proxies—has increased tensions in the Middle East, which is home to most of the world's oil resources.

The possibility of further escalation in the region has brought with it concerns that global oil supply could be disrupted, leading to an increase in oil prices.

The price of a barrel of Brent crude exceeded 92 dollars on April 12, marking its highest level since October 2023, amid expectations that Iran would carry out a retaliatory attack against Israel. On the same day, the price of a barrel of West Texas Intermediate (WTI) crude reached 87.67 dollars.

Following the attack, Iran's statement on April 14 that the military operation had been successfully concluded and that no further action was intended helped to calm risk perception, albeit to a limited extent. This eased the upward pressure on oil prices somewhat on the following trading day.

While discussions continue uninterrupted regarding how and when Tel Aviv will respond to Tehran's retaliatory attack, oil prices have followed a volatile course.

The price of a barrel of Brent crude, which rose to 91.05 dollars on the first trading day of the week, fell to 86.09 dollars on Thursday. The price of a barrel of WTI crude fluctuated between 81.56 and 86.28 dollars throughout this week.

Oil prices, which moved rapidly upward yesterday morning following news reports that Israel had launched an attack on Iranian territory, gave back most of these gains during the day.

RISK FACTOR: GEOPOLITICAL TENSION

Jorge Leon, Senior Vice President at the Norway-based independent research firm Rystad Energy, stated that the current geopolitical tension continues to be a significant risk factor.

Leon noted that eyes in the markets are turned to the Middle East to see whether Israel's retaliatory attack on Iran is a one-off event or a spark that ignites a wider conflict between the two regional powers.

Pointing out that oil prices reacted quickly to the news of Israel's attack on Iranian territory but then fell back, Leon said, "While it is difficult to assess whether this is a temporary pause or the beginning of a new escalation in the conflict between Iran and Israel, the initial market reaction suggests the former is more likely."

Leon stated that they believe the most likely scenario is one where tensions do not escalate, but noted that this does not mean hostilities and armed attacks between the parties will end; rather, as in Israel's attack today, this scenario would involve well-calibrated retaliatory strikes between the parties.

Emphasizing that the real risk is the possibility that a wrong move by either side could quickly trigger a new escalation in the already unstable region, Leon said:

"If one thing is certain, it is that geopolitics will play an even greater role in the oil market in the coming days and weeks. Therefore, sharp price fluctuations may occur in the short term."

Noting that yesterday's attack was a good example of these fluctuations, Leon added, "As Rystad Energy, we calculate that the 'fair value' of Brent crude for April, based entirely on supply and demand fundamentals, is just under 83 dollars per barrel. This means that the current geopolitical risk premium is around 5 to 6 dollars per barrel."

Stating that the geopolitical risk premium will stabilize and gradually decrease unless there is a significant escalation in the conflicts in the Middle East, Leon said, "We have two reasons for this claim. The first is that the OPEC+ group has an unprecedented amount of spare capacity of nearly 7 million barrels per day. The second is that in a few weeks, in the absence of actual supply disruptions, geopolitical fatigue will begin to play a role."