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Oil Prices Fall After Iran Attack as Market Draws Down Risk Premium 

A complex of pipes used for the export of crude oil in a dock that is part of the Ecopetrol refinery, is seen in Cartagena, Colombia April 12, 2024. (Reuters)
A complex of pipes used for the export of crude oil in a dock that is part of the Ecopetrol refinery, is seen in Cartagena, Colombia April 12, 2024. (Reuters)
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Oil Prices Fall After Iran Attack as Market Draws Down Risk Premium 

A complex of pipes used for the export of crude oil in a dock that is part of the Ecopetrol refinery, is seen in Cartagena, Colombia April 12, 2024. (Reuters)
A complex of pipes used for the export of crude oil in a dock that is part of the Ecopetrol refinery, is seen in Cartagena, Colombia April 12, 2024. (Reuters)

Oil prices fell at Asia's open on Monday, as market participants dialed back risk premiums following Iran's attack on Israel late on Saturday which the Israeli government said caused limited damage.

Brent futures for June delivery fell 24 cents to $90.21 a barrel while West Texas Intermediate (WTI) futures for May delivery were down 38 cents at $85.28 a barrel by 1256 GMT.

The attack involving more than 300 missiles and drones was the first on Israel from another country in more than three decades. It had raised concerns about a broader regional conflict affecting oil traffic through the Middle East.

But the attack, which Iran called retaliation for an air strike on its Damascus consulate, caused only modest damage, with missiles shot down by Israel's Iron Dome defense system. Israel, which is at war with Iran-backed Hamas fighters in Gaza, has neither confirmed nor denied it struck the consulate.

While Israeli officials said the country's war cabinet was in favor of retaliation, the US said it would not take part in any offensive against Iran. Global powers, other Arab nations and the UN secretary general have issued calls for restraint.

"The Iranian retaliatory missile and drone attack on Israel yesterday morning appears sufficient in size to revenge the killing of Iranian military personnel in Syria without being damaging enough to trigger a further escalation in hostilities at this point," IG market analyst Tony Sycamore said in a client note.

Oil benchmarks had risen on Friday in anticipation of a retaliatory attack by Iran, touching their highest levels since October.

But prices still ended the week down about 1% after the International Energy Agency lowered its forecast for oil demand growth this year.

Despite the limited damage sustained by Israel, analysts were widely expecting at least a short-lived rally in prices this morning.

The attack marks an "unprecedented and dangerous development in an already volatile region," said Rystad Energy Senior Vice President Jorge Leon.

Analysts said more significant and longer-lasting price effects from the escalation would require a material disruption to supply, such as constraints on shipping in the Strait of Hormuz near Iran.

So far, the Israel-Hamas conflict has had little tangible impact on oil supply.

A "less certain path to Fed rate cuts" because of persistent US inflation also weighed on prices, Sycamore said. "However, in the medium term, ongoing geopolitical instability in the Middle East and Europe means that all the risks remain to the topside in crude oil towards $90."

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Bank of England Cuts Main Interest Rate by a Quarter-point to 4.75%

Bank of England Deputy Governor for Monetary Policy Clare Lombardelli, Bank of England Governor Andrew Bailey, The Bank of England's Head of Media and Stakeholder Engagement Katie Martin and Deputy Governor, Markets and Banking, Dave Ramsden hold the central bank's Monetary Policy Report press conference at the Bank of England, in London, on November 7, 2024. HENRY NICHOLLS/Pool via REUTERS
Bank of England Deputy Governor for Monetary Policy Clare Lombardelli, Bank of England Governor Andrew Bailey, The Bank of England's Head of Media and Stakeholder Engagement Katie Martin and Deputy Governor, Markets and Banking, Dave Ramsden hold the central bank's Monetary Policy Report press conference at the Bank of England, in London, on November 7, 2024. HENRY NICHOLLS/Pool via REUTERS
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Bank of England Cuts Main Interest Rate by a Quarter-point to 4.75%

Bank of England Deputy Governor for Monetary Policy Clare Lombardelli, Bank of England Governor Andrew Bailey, The Bank of England's Head of Media and Stakeholder Engagement Katie Martin and Deputy Governor, Markets and Banking, Dave Ramsden hold the central bank's Monetary Policy Report press conference at the Bank of England, in London, on November 7, 2024. HENRY NICHOLLS/Pool via REUTERS
Bank of England Deputy Governor for Monetary Policy Clare Lombardelli, Bank of England Governor Andrew Bailey, The Bank of England's Head of Media and Stakeholder Engagement Katie Martin and Deputy Governor, Markets and Banking, Dave Ramsden hold the central bank's Monetary Policy Report press conference at the Bank of England, in London, on November 7, 2024. HENRY NICHOLLS/Pool via REUTERS

The Bank of England cut its main interest rate by a quarter of a percentage point on Thursday after inflation across the UK fell below its target rate of 2%.
The bank said its rate-setting panel lowered the benchmark rate to 4.75% — its second cut in three months — though its governor Andrew Bailey cautioned that interest rates would not be falling too fast over coming months.
“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” he said. “But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”
In the year to September, UK inflation stood at 1.7%, its lowest level since April 2021 and below the central bank’s target rate of 2%, The Associated Press reported.
Central banks worldwide dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up and then because of Russia’s full-scale invasion of Ukraine which pushed up energy costs.
As inflation rates have recently fallen from multi-decade highs, the central banks have started cutting interest rates.
Economists have warned that worries about the future path of prices following last week's tax-raising budget from the new Labour government and the economic impact of US President-elect Donald Trump may limit the number of cuts next year.
The decision comes a week after Treasury chief Rachel Reeves announced around 70 billion pounds ($90 billion) of extra spending, funded through increased business taxes and borrowing. Economists think that the splurge, coupled with the prospect of businesses cushioning the tax hikes by raising prices, could lead to higher inflation next year.
The rate decision also comes a day after Trump was declared the winner of the US presidential election. He has indicated that he will cut taxes and introduce tariffs on certain imported goods when he returns to the White House in January. Both policies have the potential to be inflationary both in the US and globally, thereby prompting Bank of England policymakers to keep interest rates higher than initially planned.