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Oil prices slide amidst Middle East tensions

Oil prices experienced a significant decline of more than $1 a barrel on Tuesday, extending a downward trend that began earlier in the day. Market sentiment was influenced by concerns over global demand levels. However, traders remained cautious, keeping a watchful eye on potential supply disruptions amid ongoing military clashes between Israel and the Palestinian Islamist group Hamas.

As of 4:54 p.m. ET, Brent crude oil was down 45 cents, trading at $87.70 per barrel, while U.S. West Texas Intermediate (WTI) crude fell by 47 cents, reaching $85.91 per barrel. Both benchmarks had experienced declines exceeding $1 during earlier trading sessions.

This drop in oil prices followed a significant surge on Monday, with Brent and WTI prices rising by more than $3.50 a barrel. The escalation in prices was driven by heightened concerns that the Israel-Hamas conflict might extend beyond the borders of Gaza.

Hamas initiated the largest military assault on Israel in decades over the weekend, while Israel responded with the most intense airstrikes seen in the 75-year history of the Israel-Palestine conflict.

Analysts from ING pointed out that “there is still plenty of uncertainty across markets following the attacks in Israel over the weekend,” highlighting the current pricing of a risk premium within oil markets.

While Israel is not a major crude oil producer, there is growing apprehension in the markets that an escalation of the conflict could negatively impact Middle East oil supplies, exacerbating an expected supply deficit for the remainder of the year.

Reports have indicated that Israel’s port of Ashkelon and its oil terminal have been closed due to the ongoing conflict. Although the United States has not presented any intelligence or evidence linking Iran directly to the attacks, a White House spokesperson stated that Iran might be complicit.

Vivek Dhar, an energy analyst at CBA, commented on the situation, saying, “If the U.S. finds evidence directly implicating Iran, then the immediate reduction in Iran’s oil exports becomes a reality.” Dhar also suggested that Brent oil could stabilise in the range of $90-$100 per barrel in the fourth quarter of 2023. However, he cautioned that the Palestine-Israel conflict increases the risk of Brent futures exceeding $100 per barrel.

In a somewhat positive development for oil supply, discussions between Venezuela and the United States have progressed. These talks could potentially lead to sanctions relief for Caracas and allow at least one additional foreign oil firm to import Venezuelan crude oil under certain conditions.

As global markets continue to grapple with the uncertainties surrounding the Israel-Hamas conflict, oil prices are expected to remain volatile in the near term, with a keen focus on supply and demand dynamics in the Middle East.

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