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Oil prices drop as traders assess risks of wider war in Middle East

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Oil prices weakened and US stocks dropped sharply on Monday following Iran’s military strike on Israel, as markets assessed the risk of the conflict escalating into a full-blown war that could curb energy supplies from the region.

Brent crude, the international benchmark, was down 0.4 per cent to $90.13 per barrel by mid-afternoon in New York — slightly trimming earlier losses. West Texas Intermediate, the US marker, fell 0.5 per cent to $85.19 per barrel.

The relatively muted reaction suggested markets were betting that the fallout from the strike would be contained after Iran said it considered the matter “concluded” and Washington sought to de-escalate tensions.

Traders had been anxiously watching to see how the market would react after the Islamic republic on Saturday launched its first strike on Israel from its own territory. Tehran sent drones and missiles into the Jewish state in retaliation for a suspected Israeli attack on its consulate in Damascus on April 1 that killed several military commanders.

Daniel Hynes, senior commodity strategist at ANZ Bank, said the fact that the attacks were well telegraphed had eased oil market concerns. “We had a build-up in the oil price before the weekend and so a geopolitical price premium was already built in prior to this event.”

US equities came under pressure on Monday afternoon, reversing small gains earlier in the session. Wall Street’s benchmark S&P 500 index dropped 1.1 per cent, while the tech-heavy Nasdaq Composite lost 1.6 per cent.

Mike Zigmont, head of trading at Harvest Volatility Management, blamed the equity market sell-off on geopolitics.

“[Equity] markets are worrying about Israel’s response” to Iran’s missile bombardment over the weekend, he said. “[But] if the world were really scared, Treasury yields would be lower [and] they’re not. So this looks like an equity market-only worry right now.”

Big tech stocks including Microsoft, Apple and Alphabet were among the biggest fallers, down 1.7 per cent, 2 per cent and 1.5 per cent respectively.

Those moves among traditionally rate-sensitive stocks also came after US retail sales data for March came in stronger than anticipated, compounding fears that the world’s biggest economy is still running too hot to merit interest rate cuts and triggering a sell-off in government bonds.

The 10-year Treasury yield rose 0.14 percentage points to 4.64 per cent, as the price of the US government bonds fell.

In Europe, the region-wide Stoxx 600 share index closed 0.1 per cent higher, buoyed by strong performance for industrial and consumer groups, while London’s energy-heavy FTSE 100 fell 0.5 per cent.

The price of gold, a haven asset, rose 1.1 per cent to almost $2,370 a troy ounce.

US President Joe Biden has urged Israel to take a measured approach in its response. Prime Minister Benjamin Netanyahu’s war cabinet met on Sunday but has not made a decision on how the country will react.

Experts warned that a severe response from Israel could exacerbate the conflict, restricting oil supplies from the region and pushing up prices.

“A significant Israeli retaliation could trigger a destabilising retaliatory cycle and move this conflict up the escalation ladder,” said Helima Croft, head of global commodity strategy at RBC Capital Markets and a former CIA analyst. “In such a scenario, we think the risk to oil is not insignificant.”

Oil prices had climbed to their highest level since October in recent weeks following the attack on Damascus as markets weighed the potential for an escalation of the conflict that could affect Gulf supplies.

Bob McNally, president of consultancy Rapidan Energy and a former energy adviser to US president George W Bush, said the fallout from the Iranian strike could still propel prices “towards, if not beyond, $100 per barrel”.

“The market had been complacent about the Gaza conflict expanding to include Iran and, therefore, a material risk to Arabian Gulf oil and [liquefied natural gas] production and exports,” he said.

A worsening of the conflict risks shocking a tight oil market globally as demand escalates in big economies such as the US and China while Opec+ producers constrain supply.

“The US and China stand to lose from the conflict’s expansion as it would significantly impact energy exports from the region, the price of oil, and the global economy,” said Ayham Kamel, practice head for the Middle East and north Africa region at consultancy Eurasia Group.

Additional reporting by Harriet Clarfelt and George Steer in New York and William Sandlund in Hong Kong

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