Oil prices fell sharply on Monday after Iran attacked a US base in Qatar in retaliation for strikes on three of its nuclear sites at the weekend, in a more restrained response than previously feared.
Brent, the global benchmark for crude, fell to $69.65 a barrel as of 8:00am, after falling more than 4 per cent earlier touching its lowest level since June 11. West Texas Intermediate, the gauge for US crude, set at $66.70 a barrel.
“We've seen a lot of risk. We've seen increase in tensions but we haven't actually seen any supply disrupted,” said Rachel Ziemba, founder of geopolitical risk firm Ziemba Insights.
Iran launched a missile strike on Al Udeid Airbase after the US struck three nuclear sites, including Fordow, at the weekend. US President Donald Trump said no casualties were reported, adding that Tehran had given Washington advanced notice of the attack.
founder of Ziemba Insights
"Iran clearly telegraphed the strike on Qatar and did not want to escalate tensions through strikes on oil and gas targets," said Matthew Bey, senior global analyst at the Rane Network.
The UAE joined Qatar and its neighbours in condemning the attack on Qatari territory, with Jasem Al Budaiwi, Secretary General of the Gulf Co-operation Council, calling it a “direct threat” to member states' security.
Iran, the third-largest crude producer in the Opec alliance, had vowed to defend itself after the strikes. Oil prices had jumped to a five-month high earlier in the day over fears that the US strikes on Iran would affect global energy supplies.
“Markets were sort of in this mode of pricing in more risk and worried about an extreme where there'd be meaningful frictions getting oil and gas to markets,” Ms Ziemba said.
“Markets are viewing this Iranian response to the US bombings and the telegraphed, face-saving measure and believing that it reduces risks.”
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An Iranian missile is intercepted over Qatar. Reuters -
Traces in the sky as seen in Doha. Reuters -
An interceptor missile in the sky over Qatar. Reuters -
People film the projectiles over Doha. AFP -
Traces in the sky above Doha. Reuters
In a social media post, Mr Trump said: "Hopefully, be no further hate" and that Iranian officials had "gotten it all out of their 'system'".
While Mr Bey said Mr Trump's recent social media posts suggest an off-ramp for current tension, "none of the underlying issues appear resolved".
Mr Trump had claimed that the US strikes had “totally destroyed” Iran's nuclear sites at Fordow, Natanz and Isfahan. US Chairman of the Joint Chiefs of Staff Gen Dan Caine told reporters on Sunday the three sites suffered “severe damage and destruction”, but said a final assessment will take time.
Meanwhile, Mr Trump warned energy producers to “keep oil prices down”, although it was not clear to whom he was directing his message. He also told the Department of Energy in a social media post to “drill, baby, drill”, a refrain the President has used as part of his broader efforts to boost domestic oil production.
US markets also edged higher after Iran's retaliatory strike. The Dow Jones Industrial Average closed up 0.89 per cent, or 374.96 points. The S&P 500 rose 0.96 per cent while the tech-heavy Nasdaq Composite climbed 0.94 per cent.
“I don't think many of us were expecting this. I think it's still highly speculative because we just don't know what the next step will be from Iran. It could be a diplomatic step or it could be escalation,” said Peter Andersen, founder of Andersen Capital Management.
Escalating tension in the Middle East has also added another layer of uncertainty facing the Federal Reserve as the US central bank awaits tariff-related inflation.
After holding interest rates between 4.25 and 4.50 per cent last week, Fed chairman Jerome Powell told reporters there could be a surge in energy prices but he did not expect a lasting impact on inflation.
While Mr Powell provided no timeline on when the Fed could cut rates again, two Fed governors broke ranks by saying the central bank could be on course to reduce policy again in July.
"Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting,” Fed Governor Michelle Bowman said during a conference in the Czech Republic.
Her remarks echoed that of fellow Fed Governor Christopher Waller, who maintained his view last week that tariff-related inflation will be a one-time effect.
In a note published after Israel's strike on Iran on June 11, JPMorgan analysts estimated oil could average between $120 and $130 a barrel if the conflict escalates through the closure of the Strait of Hormuz, driving up shipping costs.
“I don't think the Fed can make any kind of rational decision right now,” said Mr Andersen.
“Why would the Fed cut rates in the face of $100 a barrel oil? I think they're well ahead of scenario planning."
