U.S. crude oil prices fell for the third consecutive trading session on Wednesday, dipping below $85 a barrel as the market appeared to dismiss the risk of a wider war between Israel and Iran that could potentially disrupt supplies. The West Texas Intermediate contract for May delivery fell 46 cents, or 0.55%, to $84.89 a barrel, while June Brent futures were down 51 cents, or 0.57%, at $89.51 a barrel. Both U.S. oil and the global benchmark are down just under 1% this week.
Analysts attribute the decline in oil prices to the market unwinding some of the war premium that had been priced in due to the ongoing tensions surrounding the Gaza conflict and the subsequent Iranian missile onslaught on Israel. "It is hard to imagine that 'cooler heads prevail' can be associated with this eons-long strife, but thus far Israel has adhered to the international calls of showing restraint," John Evans, an analyst at oil broker PVM, wrote in a note Wednesday.
Despite the recent pullback, oil prices remain elevated compared to levels seen earlier this year, as concerns persist over the possibility of a wider conflict in the Middle East. UK Foreign Secretary David Cameron, speaking to reporters in Jerusalem before meeting with Israeli officials, said, "It's clear the Israelis are making a decision to act" against Iran. However, he expressed hope that they would do so in a way that minimizes escalation.
In response, Iranian President Ebrahim Raisi warned that any counterattack by Israel would be met with a "massive and harsh" response, underscoring the delicate nature of the situation and the potential for further volatility in oil markets.
Adding to the downward pressure on oil prices, data from the American Petroleum Institute (API) showed on Tuesday that U.S. crude inventories rose just over 4 million barrels in the week to April 12, significantly exceeding expectations for a build of 600,000 barrels. The build, which followed a 3 million barrel rise in the prior week, was largely driven by U.S. production remaining at record highs above 13 million barrels per day, offsetting increasing refinery activity and raising concerns that U.S. oil markets were not as tight as initially thought.
However, a drop in gasoline inventories of about 2.5 million barrels indicated that demand in the world's biggest fuel consumer was picking up with the approaching summer season. The API data usually heralds a similar reading from official U.S. inventory data, which is due later in the day.
Concerns that restrictive U.S. monetary policy could further stymie demand in the world's largest economy this year also weighed on oil prices, especially with economic growth already seen cooling. Mixed economic data from China added to these concerns, further dampening sentiment in the oil market.
Bank of America Securities has drawn up three scenarios concerning events in the Middle East and the likely reaction of crude to each. In a limited Iran-Israel tit-for-tat military skirmish that does not lead to any disruptions in energy supplies, analysts at the bank believe oil prices would add back an incremental risk premium of about $5-$10/bbl. An escalating conflict between these two countries that impacts energy infrastructure and lasts several months, leading to major Iranian oil supply disruptions, could push oil prices up by $30-$40/bbl initially, with prices eventually settling at around $100-$130/bbl. In the worst-case scenario of an expansive regional war resulting in major oil disruptions of 2 million barrels a day or more, prices could surge by $50 to $150/bbl, settling above $150/bbl for several months before the risk of a global recession emerges, creating downward pressure on Brent prices in 2025.
