Investing.com-- Oil prices settled lower Monday, as Iran's retaliatory strike on Israel was less bad than feared signaling that Tehran isn't vying for a significant confrontation that fear could spark an all-out regional conflict.
At 14:30 ET (18:30 GMT), West Texas Intermediate crude futures dropped 0.3% to settle at $85.41 a barrel, while Brent oil futures fell 0.3% to $90.14 a barrel.
Fears of wider war in Middle East cools; Israel retaliation in focus
Iran launched a wave of missile and drone strikes against Israel over the weekend, retaliating for an alleged attack on an embassy in Syria.
But analysts said that the attack presented limited upside for oil prices, given that it was largely telegraphed and caused little serious damage.
In a sign that Tehran isn't looking for major conflict with Israel, the Islamic Republic signaled that it did not plan to carry out any further attacks, easing fears that the Middle East was on the brink of major regional conflict.
Still, Israel’s response to the attack is now expected to determine just how the conflict will play out, with the country reportedly said to be preparing to launch an imminent response against the Iranian strike, NBC reported, an unnamed source.
“The conflict could still be contained to Israel, Iran and its proxies, with possible involvement of the U.S. Only in an extreme case do we see it realistically impacting oil markets,” ANZ analysts wrote in a note.
The risk of a direct conflict escalation, however, would add $5-$10 a barrel to price forecasts, Wells Fargo (NYSE:WFC) saud in a note.
"If the current Middle East conflict expands and/or intensifies and physical volumes are curtailed, then we expect a much higher oil price would result. At a minimum, we believe a physically disrupted market could retest nominal oil price peaks around $140/bbl," the U.S. bank added.
Middle East disruptions offset by spare capacity
ANZ analysts tend to disagree, stating that the actual impact of Middle East disruptions on global oil markets would be limited, given that major producers still had ample spare capacity to push up output.
“OPEC recently reiterated its supply policy, with recent production cuts extended until the end of June. However, that leaves it with approximately 6.5mb/d of spare capacity. Most of this could be quickly brought online should disruptions emerge,” ANZ analysts said.
Still, with lower OPEC production in the coming months, and with the Russia-Ukraine conflict also disrupting some oil production for Moscow, global oil markets are likely to remain tight in the near-term.
On the other hand, fears of softer demand are also expected to remain in play, especially after dismal economic data from top importer China. China is set to release its first-quarter gross domestic product figures on Tuesday.
(Peter Nurse, Ambar Warrick contributed to this article.)