Oil Ekes Out Gain After Iran's Muted Response to Israel Strike

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(Bloomberg) — Oil eked out a meager gain after Iranian media appeared to downplay the effect of Israeli strikes, lowering the geopolitical risk premium for crude. 

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Global benchmark Brent earlier soared more than $3, popping above $90 a barrel, after the attack reignited concerns that a wider regional conflict could endanger oil supplies. Israel launched a strike on Iran, according to two US officials, but the Islamic Republic’s state media said the attack failed. The strikes followed last weekend’s unprecedented bombardment by Tehran.

An Iranian military official told Reuters the country isn’t planning to react immediately. Traders had been awaiting an Israeli response to last weekend’s missile and drone attack, with the rhetoric escalating as Tehran warned against striking its nuclear facilities. The Middle East accounts for about a third of global crude supply.  

There have been signs in recent days that crude’s risk premium was easing, with benchmark crudes falling sharply earlier this week. While Friday’s muted response to the Middle East may bolster the view that traders are confident that an escalation in the region can be avoided, there has been a flurry of options buying this month to protect against a price spike.

“Our analysis suggests a fair market value of $83 per barrel based on fundamentals, indicating a current premium attributable to geopolitical concerns,” Jorge Leon, senior vice president of oil market research at Rystad Energy, said in a note. “The near future is likely to see continued volatility in the oil market due to these geopolitical factors.”

The deluge of market-moving headlines prompted unusually large trading of both futures and options early in the day. About 950,000 Brent futures had traded by midday in London, roughly the same amount as would trade in an entire session normally. 

Brent has rallied around 13% this year, with gains driven by the worsening hostilities in the Middle East, as well as OPEC+ supply cuts that have tightened the market. Higher energy prices, if sustained, would boost risks for the global economy and pose a challenge for central bankers as they seek to tame inflation.

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