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Oil prices fall as tensions ease between Iran and Israel, reducing fears of broader conflict.

Fears of Conflict in Middle East Ease as Iran’s Retaliation Falls Short

Oil Prices Drop Amidst Iran’s Limited Retaliatory Strike

Oil prices saw a decline on Monday as Iran’s response to Israel’s alleged attack was less severe than anticipated. This signaled Tehran’s reluctance to engage in a significant conflict that could escalate into a broader regional war. At 14:30 ET (18:30 GMT), oil prices dropped by 0.3%, with crude settling at $85.41 a barrel and Brent at $90.14 a barrel.

Iran’s Limited Response and Israel’s Potential Retaliation

Iran conducted missile and drone strikes against Israel over the weekend in retaliation for an alleged embassy attack in Syria. However, analysts noted that the impact on oil prices was minimal as the attack was expected and caused little damage. Tehran’s indication that further attacks were not planned eased concerns of a major conflict in the region.

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Israel’s response to Iran’s strike will determine the course of the conflict, with reports suggesting an imminent Israeli retaliation. Analysts only foresee a significant impact on oil markets if the conflict expands beyond the current parties involved.

Potential Escalation and Impact on Oil Prices

While direct conflict escalation could increase price forecasts by $5-$10 per barrel, a disrupted market could push prices to peaks around $140/bbl. However, major oil producers still maintain spare capacity to mitigate disruptions in the Middle East.

Middle East Disruptions and Global Oil Markets

Despite disruptions in the Middle East and the Russia-Ukraine conflict affecting oil production, major producers have spare capacity to stabilize global markets. OPEC’s extended production cuts and ample spare capacity ensure minimal impact on global oil supply. However, with lower OPEC production and ongoing geopolitical tensions, oil markets may remain tight in the near future.

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Additionally, concerns about weakened demand, particularly due to economic data from China, further contribute to market uncertainties.

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