Oil prices tumbled by over four per cent on Tuesday after soft economic readings from China and reports that Israel has assured the US it would avoid oil and nuclear facilities in its expected retaliation on Iran.
The price of Brent crude dropped 4.4 per cent – or $3.42 (£2.61) a barrel – and WTI Crude fell nearly five per cent to $70.25.
According to the Washington Post, Israeli Prime Minister Benjamin Netanyahu has assured the Biden administration he is willing restrict his armed forces’ response to Iran’s attack on October 4 to military – rather than oil or nuclear – targets.
The reports calmed jitters among oil traders that Israel’s response would hit the supply of oil, pushing up on oil price and triggering a mirrored rise in the oil futures market.
Traders’ fears were were also soothed by markets’ softening response to the fiscal and monetary stimulus announced by the People’s Bank of China (PBoC) last month.
This, combined fiscal package that the Chinese government had promised would follow, lifted oil prices on expectations that demand from the world’s largest purchaser of oil would rise.
But a lack of clarity around the fiscal stimulus from Chinese officials, and sluggish export and credit data, has led the initial spike to peter out, putting downward pressure on the price.
“The price of oil has been volatile in recent weeks, as it gets jostled around by news flow surrounding the Middle East crisis,” said Kathleen Brooks, research director at FX broker XTB.
The latest news suggests that Israel will not directly target Iran, and so an escalation premium is being removed from the oil price right now.
“This could hit the FTSE 100’s oil companies, and the energy sector could extend its decline after it was one of the weakest performers [at the start of this week].”
The fall in the oil price follows several weeks. which rose the likelihood of a regional conflict rose after Israel’s ground invasion in Lebanon and Iran’s decision to launch an air strike comprising 200 missiles into Israel.
Brent crude peaked at $77.14 a barrel on 7 October, after Joe Biden said that the US was discussing with Israel whether it would support an Israeli retaliation that targeted oil refineries.
Asked by reporters in early October whether the US would back Israel hitting Iran’s oil facilities in a strike, Biden said: “We’re in discussion of that.”