Oil prices started the new trading week with significant losses, Commerzbank’s commodity analyst Carsten Fritsch notes.

Price reaction in the oil market may be exaggerated

“The Brent oil price fell by more than 4% or a good 3 USD per barrel right at the opening. The same applies to the WTI oil price. As trading progressed, the losses deepened, with both oil prices ending the day down 6% and falling to their lowest level since early October. Brent temporarily fell to almost $71 per barrel, WTI to $67.”

“Israel's retaliatory strike against Iran over the weekend is apparently being interpreted defensively by the market, as only military targets such as missile launchers were hit. Iran's oil and nuclear facilities were spared. Iran reported only minor damage over the weekend. As a result, market participants believe that the risk of a spiral of escalation and supply disruptions in the oil market has decreased, which is reflected in the noticeable decline in the risk premium.”

“From a purely fundamental perspective, Brent oil in the low 70s is appropriately priced, since the oil market is sufficiently supplied and there is a looming oversupply in the coming year. However, since it is not yet clear whether and how Iran will react to the Israeli strike, it would be premature to completely rule out an escalation. Therefore, yesterday's price reaction in the oil market may have been exaggerated.”