Plummeting Oil Prices: On the Brink of Collapse?

The geopolitical risk premium for crude oil has cooled sharply, and there is a risk of oil prices collapsing, with the ultimate "bottom" potentially as low as $30...

Due to the fact that Iran's energy facilities were not damaged in the Israeli attack over the weekend, U.S. crude oil experienced a significant sell-off on Monday, plunging as much as 6% at one point, marking the worst day in over two years, while Brent crude fell by more than 5%.

Israel's latest retaliation against Iran and the latter's downplaying of the damage have sparked market speculation that both sides are currently trying to avoid escalating the conflict. As a result, the geopolitical risk premium in the oil market has plummeted, returning to the levels prior to the latest escalation in the Middle East situation.

According to Tasnim, Iran's state-run Islamic Republic News Agency reported that the attack resulted in the death of four soldiers and "limited" damage. The attack avoided areas where oil, nuclear, and civilian infrastructure are located. Iran's oil news website Shana stated that Iran's oil industry operations are "proceeding normally" without interruption.

Andy Lipow, President of Lipow Oil Associates, said, "As Israel consciously avoids targeting Iranian oil facilities, perhaps under some deterrence from the United States, the oil market has returned to a state of oversupply."

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Saul Kavonic, an energy analyst at MST Marquee, stated that the risk premium has dropped by several dollars per barrel due to the limited nature of Israel's strikes, including avoiding oil infrastructure, which has given hope for a de-escalation in geopolitical tensions.

Kavonic told CNBC that the focus will now be on whether Iran will retaliate in the coming weeks, which would cause the risk premium to rise again. He pointed out that the overall trend of the conflict is still escalation, and it is very likely that another round of attacks will occur.

At a cabinet meeting on Sunday, Iranian President Masoud Pezeshkian emphasized Iran's right to respond to Israeli attacks. "We do not seek war, but we will defend our country and the rights of our people. We will respond proportionally to acts of aggression," he said.

Iranian Foreign Ministry spokesman Baghi said on Monday that Tehran will "use all available tools" to respond to Israel's weekend attacks on Iranian military targets.

Vivek Dhar, head of mining and energy commodity research at the Commonwealth Bank of Australia, believes that market attention will shift to the ceasefire negotiations between Hamas-Israel and Israel-Hezbollah, which resumed over the weekend."Although Israel has chosen a low-aggression response to Iran, we are skeptical whether Israel and Iran's proxies, namely Hamas and Hezbollah, are on a path to a lasting ceasefire," Dhar wrote in a report.

Although the oil market's sell-off was a sigh of relief because Israel did not strike Iran's oil facilities, Rapidan Energy founder Bob McNally said the market is not out of the woods yet.

"Direct conflict between Israel and Iran could continue. Israel has indicated that it is capable and willing to target Iran's energy and nuclear targets in future strikes," McNally said, adding that he expects oil prices to remain range-bound.

However, from a technical perspective, oil prices are on the brink. Fxstreet analyst Alexander Kuptsikevich said that, from a chart perspective, the recent price drop has tipped the scales in favor of the bears. In October, crude oil bulls managed to keep prices above the 50-month moving average (which roughly coincides with the 200-week moving average), a key support line since the beginning of the year and breached in August.

As a new week begins, oil prices are testing the horizontal support level of the past two years. Closing below the September low of $65 in October would be a major bearish signal and could accelerate the decline in oil prices. There is a risk of a collapse in oil prices, with the next downside target being the $50 area, a significant psychological level. The history of oil price collapses in 2008-2009, 2014-2015, and 2020 shows that the ultimate "bottom" may not be reached until the $30-35 range.