(Bloomberg) -- Oil plunged at the start of the week after Israeli strikes against targets in Iran avoided the OPEC member’s crude facilities, raising the prospect that hostilities in the region may ease.
West Texas Intermediate plummeted 6.1% to settle near $67 a barrel, the biggest one-day drop for the US benchmark in more than two years. Brent slid 6.1% to settle below $72 a barrel.
Israeli jets struck military targets across Iran on Saturday, delivering on a vow to retaliate for a missile barrage at the start of the month, though the attack was more restrained than expected. The strike avoided oil, nuclear and civilian infrastructure, in line with a request from US President Joe Biden’s administration.
The market’s political risk premium showed signs of fading across the board. In addition to falling prices, the cost of bullish options contracts plunged relative to bearish ones. The rout extended deep into next year, with the premium for Brent’s May futures over June futures narrowing to as low as 5 cents, a sign that traders foresee an impending supply glut.
Iran’s state media said that the country’s oil facilities were working normally, though the country’s foreign ministry said the nature of its response will correspond to the type of attack carried out.
Iran’s missile attack on Oct. 1 restored a war premium to oil that pushed the US benchmark above $75 a barrel earlier this month. Still, prices are almost $20 lower than the first session after the Oct. 7 attack that sparked the conflict last year, with the decline driven by lackluster Chinese demand and expectations of an oversupply early next year.
“The real fear of oil being taken off the world market has been nearly eliminated,” said Dennis Kissler, senior vice president for trading at BOK Financial Securities. Traders are re-focusing on weak demand, with near-term oil prices taking the path of least resistance lower, he added.
The $4 dip in prices to open the session created a so-called chart gap, which then prompted a corrective move to fill in the break that has helped prices pare losses, Kissler said.
Monday’s slump comes ahead of a crucial few weeks for prices, with a host of influential events looming, including the US election. OPEC+ plans to start gradually reviving oil production in December, and the market is watching for any change to that timeline.
Though the planned output increase in the near-term is small, it will add supplies to a market that the International Energy Agency forecasts won’t need them. Last week, hedge funds slashed their long-only positions in WTI to the lowest in 14 years.
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