There is a sigh of relief in the oil markets, at least for the time being. The ‘limited’ Israeli retaliatory strike against Iran early Friday morning provided the space for Tehran to label the attacks as almost a non-event.

The Israeli response was regarded as so weak that Israel’s hawkish national security minister, Itamar Ben Gvir, conceded he wasn’t happy with his country’s response. “Weak”, he said in a one-word post on X (formerly Twitter) in Hebrew, while the Iranian state TV dismissed Friday’s strike, blasting it as “Israeli and American media propaganda”. Following the attacks, oil market prices spiked but then fell.

In an almost knee-jerk reaction to the much-anticipated Israeli attack on Iran, oil prices briefly surged Friday morning. However, they dropped quickly, following the Iran state media’s apparent downplaying of the strikes and the realisation that the Israeli retaliation was very limited in scope. This was more of an exercise in public relations to pacify its constituency.

And, although oil market prices settled slightly higher on Friday, that was still a weekly decline. Brent futures settled up 18 cents, or 0.21 per cent, at $87.29 a barrel. The front-month US West Texas Intermediate (WTI) crude contract for May ended 41 cents higher, or 0.5pc, to $83.14 a barrel.

In an election year, the Biden administration cannot afford elevated gas prices, hence there has been growing diplomatic pressure on Israel and Iran to de-escalate

The more active June contract closed 12 cents higher at $82.22 a barrel.

Both benchmarks had spiked more than $3 a barrel earlier in the session on Friday after explosions were heard in the Iranian city of Isfahan in what sources in the US and elsewhere were describing as an Israeli attack.

However, the gains were capped after Tehran not only played down the strikes almost as a non-incident but also underlined that it did not plan to retaliate.

In the end, it turned out to be nothing “but a big show, and so the markets deflated as quickly as they spiked”, Tim Snyder, an economist at Matador Economics, was quoted as saying.

Almost the same act was played a week earlier when Iran had fired a barrage of missiles at Israel. On April 12, with the weekend approaching, everyone knew then, too, that an Iranian attack on Israeli soil was looming over the next 24 to 48 hours. Consequent to the intelligence warnings and media reports of the coming Iranian direct attack on Israel, oil prices spiked on Friday, April 12.

But the Iranian attack on April 13 was also regarded by most as ‘measured and calculated’. It lasted a mere few ‘tense’ hours and was calculated and ‘measured’, with enough warning. The attacks were not designed to bring about large-scale damages, destruction and fatalities in Israel, analysts underlined. It was more to follow up on its words of responding to Israel’s April 1 attack on the Iranian consulate in Damascus at ‘a time and place of its choice’.

The early warning that an attack was coming also provided Israeli Prime Minister Benjamin Netanyahu, his government, and the military machine of its allies present in the region with ample opportunity to be fully prepared for what was about to come.

Consequently, in military terms, the Iranian missile and drone attacks failed to make much impact on Israel. Also, Iran refrained from using its proxies — Hezbollah and Houthis — to augment the impact of its attack on Israel.

Thus, as soon as markets reopened for the first time after the Iranian attacks on Monday, April 15, after a brief spike, oil markets went down and stabilised — as is the case this time. The same happened after the retaliatory Israeli attack on Iran early this Friday.

Analysts believe the action and the counteraction by Iran and Israel show that both sides wanted to avoid a full-blown conflict that could choke off the supply of oil to the world from the oil-rich Middle East.

Further, an increase in US crude oil inventories, which shot up the last week by 2.7 million barrels to approximately 460m barrels, also helped calm the crude oil markets.

Markets are also taking into account that the Organisation of Petroleum Exporting Countries (Opec) have a spare capacity of roughly 6m barrels per day (bpd), and that capacity could be immediately brought into the markets if required.

“Traders are also relatively sanguine 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 causes prices to jump towards $100,” the Financial Times reported in a follow-up piece.

Controlling inflation remains a major objective of most central banks of the world today. If oil prices begin to get higher, most understand that efforts to control inflation would receive a major blow, and that cannot be permitted. Furthermore, in an election year, the Biden administration cannot afford elevated prices at gas stations. Hence, there has been growing diplomatic pressure on Israel and Iran from all around to de-escalate tensions in the region and avoid any flaring up.

Hectic, behind-the-scenes diplomacy seems to be making an impact. There is now a growing confidence in the market that the Israeli action will not escalate into a broader conflict in the Middle East. For the time being, the oil markets have shrugged off the Israeli attacks, and the possibility of any expansion of the war theatre in the Middle East has gone down.

All this could eventually lead to a reduction in the war premium, and oil prices could go down to some extent over the next few days and weeks — unless something unforeseen overtakes the markets.

Published in Dawn, The Business and Finance Weekly, April 22nd, 2024