Bloomberg

Oil markets are relinquishing the Middle East risk premium that nearly propelled prices to $100 a barrel. The shift is a sign of maturity — but also complacency.

It still seems incredible that, in the wake of reciprocal attacks by Iran and Israel, crude prices are faltering. Tensions between the two nations have vexed oil markets for years, and direct conflict was always the most-feared scenario.

Yet now that it’s arrived, traders are shrugging, and Brent futures have retreated below $87 a barrel.

On the one hand, the pullback is entirely rational. Tehran and Tel Aviv have advertised they’re conducting limited, face-saving acts of retribution rather than initiating a wider war. Oil supplies remain unaffected.

It also illustrates the market’s growing maturity concerning geopolitical risk. Having panicked at even minor incidents in the Middle East for years, the petroleum industry has been toughened up by genuine upheavals such as sanctions on Russia and the 2019 attack on Saudi Arabia’s Abqaiq processing plant.

More worrying for bullish crude traders, the price lethargy points to underlying frailties in oil fundamentals. These are most glaring in China, the engine of fuel demand growth, which has seen its strong economic start to the year fizzle amid deepening deflation and persistent troubles in the real-estate sector.

But the market’s calm could also be seen as misguided.

While Iran and Israel haven’t indicated they plan further offensives, the enduring violence in Gaza remains a flashpoint that may trigger escalation.

The conflict poses a number of risks to oil supplies: US President Joe Biden has broadened sanctions on Iranian exports, and Tehran could retaliate by disrupting the key Strait of Hormuz. Meanwhile, Iran’s Houthi allies continue to menace shipping in the Red Sea.

Finally, there’s the OPEC+ alliance led by Saudi Arabia.

When prices were creeping toward triple digits, officials from the coalition admitted concern about the danger of hurting demand or giving a financial boost to rival producers.

That might have encouraged the group to increase output when it meets in early June. But with the market sagging, OPEC+ may be more inclined to keep a tight grip on the spigots.

–Grant Smith, Bloomberg News