Oil prices trade lower despite a worsening situation in the Middle East

"An attack was largely priced in the days leading up to it. Also, the limited damage and the fact that there was no loss of life means that maybe Israel's response will be more measured," ING’s Warren Patterson said, as quoted by Reuters.

Indeed, the degree of geopolitical uncertainty rose significantly despite the fact that Iran’s retaliation was a non-surprise, as the West seeks a diplomatic way out of a further escalation while both Iran and Israel vow to respond to each other’s next moves reciprocally.

ING’s Patterson and commodity strategist Ewa Manthey said in a note from earlier today that Iran had signalled the drone strike “concluded” the whole affair for it but it was not certain whether Israel saw things the same way.

News this morning that overnight Israel had attacked an Iranian nuclear site saw oil prices trade higher as Brent crude jumped to $88 dollars per barrel. However, gains receded after Iranian state media claimed that there was "no damage" in Isfahan province where there had been reports of explosions.

Naturally, this has heightened risks around oil supply from the Middle East, and especially Iran, which despite sanctions has boosted its output to some 3 million barrels daily and is currently the fourth-largest producer within OPEC.

In this context, according to the Dutch bank, there were two risks inherent to oil supply in the situation. First, the U.S. could tighten the sanction noose because of the strike on Israel and prompt cuts in output. Second, Israel could retaliate by targeting Iranian energy infrastructure, again affecting supply.

Sharp and sustained rises in oil prices risk fuelling inflation as fuel and energy prices have been a major driver behind the higher cost of living worldwide in the past couple of years.

While the pace of inflation has been slowing, in the UK it is still above the Bank of England's 2% target and some economists have forecast that a cut to interest rates may not happen until summer or later on in the year.

As we head into the final week of April the geo-political backdrop in the Middle East appears more and more uncertain and extremely fragile.

For fuel card users a further price drop in the region of .7 – 1.2 pence per litre for next week offers some good news.


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