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Oil prices fell Friday after Israeli retaliation against Iran sparked a short-lived rally, a sign of investor confidence that the action would not escalate into a broader conflict in the Middle East.
Brent crude, the international benchmark, fell 0.5% on the day to $86.68, after jumping to $90.75 earlier in the session.
Prices fell after Iranian state media downplayed the damage caused by the attacks. Oil is currently below the level seen before Tehran’s drone and missile attack on the Jewish state last week.
Analysts said the reaction shows growing confidence that both sides want to avoid a full-scale conflict that would choke off oil supplies, while traders are also convinced that U.S.-led diplomatic efforts – where President Joe Biden is keen to avoid a sharp rise in energy prices as he campaigns for re-election – will prevent the crisis from spiraling out of control.
“This will probably go a long way in convincing the market that this situation is not going to completely explode,” said Bjarne Schieldrop, chief commodities analyst at SEB. “The hope is that retaliatory strikes will diminish in magnitude and then stop. »
Traders are also relatively optimistic because OPEC+ producers, which have been implementing voluntary cuts since 2022, will be ready to pump more crude in the event of an escalation that sends prices towards $100.
Some analysts have warned that markets may be underestimating the potential for an escalation that would lead to disruption of supplies through the Strait of Hormuz.
Helima Croft, head of commodities research at RBC Capital Markets, said current oil prices were not an “accurate barometer” of growing pressure in the region.
“We continue to maintain that the risk of war in the Middle East points to escalation and not de-escalation at this time,” she said in a note ahead of the latest Israeli action against Iran. “We continue to see a direct threat to regional oil supplies in an expanded war scenario. »