Oil’s Risk Premium Plunges as Middle East Tensions Ease

Israel’s retaliatory attack on Iran avoided targeting crude and nuclear infrastructure, signalling a potential de-escalation of the conflict
Market attention has now shifted toward weak demand in China and a robust global oil supply
OPEC+ has postponed its planned output increase until December, aiming to prevent further price declines amid sluggish demand

Oil’s Risk Premium Plunges as Middle East Tensions Ease

The risk premium added to oil markets following Iran’s missile attacks on Israel earlier in October had pushed Brent prices above $80 per barrel. However, the benchmark has since dropped, pressured by softer demand from China and a surplus outlook for early next year.

Oil prices plunged further on Monday after Israeli airstrikes on Iran over the weekend targeted military assets. These strikes were carried out in response to the recent missile attacks from Iran but were more restrained than feared, as Israel avoided targeting oil, nuclear, or civilian facilities, signalling a potential de-escalation of their direct conflict. This move has reduced crude’s geopolitical risk premium and pushed prices lower.

A restrained response from Tehran, has led investors to anticipate a lower probability of immediate escalation that would disrupt oil supplies in the region, although the Iranian government has indicated it may respond in proportion to the nature of Israel’s actions. Unless Iran responds further, Israel will likely confine its actions to targeting proxy forces rather than Iran itself in the lead up to the U.S. elections.

Focus Shifts Back to Fundamentals

With geopolitical tensions easing, market focus has shifted back to weak demand especially from China and robust global supply, which continue to exert downward pressure on oil prices.

A prevailing perception of oversupply and muted demand is fuelling bearish sentiment among oil traders. China remains a key focal point for demand, while the OPEC+ production cuts are failing to keep oil prices higher, despite slowing U.S. oil output. Given the current low crude prices, there is a potential that OPEC+ may defer its planned increase in production targets beyond December.

Global energy markets remain focused on the balance between supply and demand, with production cuts by OPEC+ showing limited success in propping up prices. The United States continues to reach unprecedented crude oil production levels, averaging 13.2 million barrels per day in 2024 and expected to remain strong in 2025. With supply likely to surpass demand by up to 1 million barrels per day next year, the long-term outlook for oil leans toward lower prices.

The recent volatility in oil prices highlights how geopolitical risks, while influential, are now tempered by the high level of global oil supply and slower demand growth.

Oil Prices Could Find Support from SPR Purchases

Oil prices have stabilized on Wednesday, following the 6% drop on Monday. This uptick came as the U.S. announced plans to purchase up to 3 million barrels of oil for its Strategic Petroleum Reserve (SPR), scheduled for delivery through May 2024.

However, broader concerns about a potential slowdown in global demand continue to weigh on prices, as economic growth decelerates in key markets like China. Additionally, with limited SPR funds, further U.S. oil purchases will require Congressional approval for additional resources.

Source: TradingView

Technical Analysis

Brent crude futures fell to a low of $70.83 per barrel on Monday before stabilizing around $71.50. While further short-term declines could occur as the geopolitical risk premium is priced out, brent is likely to encounter a strong support around $68 per barrel in the short-term.

The Relative Strength Index (RSI) is firmly in the sideways market range suggesting that further consolidation between $69.00 and $80.00 is likely in the coming months. However, the overall long-term trend remains bearish and a subsequent break below support of $68.29 could send brent prices to $64.00.

Conclusion

Despite ongoing Middle East tensions and current OPEC+ output cuts, the record high U.S. oil production and weaker global demand could further reduce the likelihood of higher prices in the long-term.

Active traders looking for magnified exposure to crude oil may consider Leverage Shares +2x Long WTI Oil or -2x Sort WTI Oil ETPs.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.