Israel attack risks add modest risk premium to crude prices

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Key points:

• Crude oil prices stay rangebound within a ten-US dollar wide range despite US intelligence suggesting Israel is preparing to strike Iran.

• Despite repeated episodes of heightened tension in recent years, traders have typically concluded that actual risks to supply are limited.

• Since 2022, Iran has despite US sanctions managed to increase production while OPEC cut production in order to manage production and ensure stable prices.

• An attack may give prices a short-lived boost amid a significant amount of spare capacity from other OPEC members that can be added at short notice.

Following the sharp price collapse in early April, both West Texas Intermediate (WTI) and Brent crude have settled into broad, yet volatile, USD 10-per-barrel trading ranges. WTI has fluctuated between USD 55 and USD 65, while Brent has traded between USD 58.50 and USD 68.50. Market sentiment continues to swing between concerns over rising global supply, and fears about the potential economic fallout from ongoing global trade tensions.

In recent days, trader focus has increasingly shifted toward the Middle East. Volatility in the oil markets has been partly driven by speculation surrounding the Iran–US nuclear negotiations. A successful outcome could pave the way for Iran to reintroduce more barrels into an already well-supplied global market, potentially putting some additional downward pressure on prices.

However, this bearish sentiment was quickly reversed within the past 24 hours. First, Iran’s Supreme Leader Ayatollah Ali Khamenei dismissed the prospects of meaningful negotiations with the US, calling Washington’s demands—particularly the requirement that Iran halt uranium enrichment—“outrageous.” This was followed by a CNN report citing new US intelligence suggesting Israel is preparing for a potential strike on Iranian nuclear facilities.

Crude prices responded with an overnight jump of USD 1 per barrel. A military confrontation involving Iran would almost certainly derail the nuclear talks and raise concerns about oil supply from the Persian Gulf, a region that accounts for roughly one-third of global crude shipments.

That said, recent history suggests that geopolitical risk premiums often struggle to take hold in the market. Despite repeated episodes of heightened tension in recent years, traders have typically concluded that actual risks to supply are limited. According to Goldman Sachs, a disruption of one million barrels per day could initially drive prices up by more than USD 5 per barrel. Yet, the impact may be short-lived due to the significant spare capacity built up by Gulf Cooperation Council (GCC) producers—particularly Saudi Arabia—and a generally soft global demand outlook.

Since September 2022, when OPEC’s total production reached a near 30 million barrel per day peak, subsequent production cuts—in order to actively manage oil production to ensure price stability—have seen the group’s output decline by around 2.7 million barrels per day, in the process surrendering market shares to non-OPEC+ producers benefiting from high and stable prices. Within OPEC, however, Iran—which has not been bound by quotas amid US sanctions—has been able to boost production by close to 900,000 barrels per day, thereby increasing its OPEC market share from 8.3% to more than 12% last month.