Why the oil market shrugged as Iran and Israel appeared on the brink of war this week

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Investors seem to believe that Israel’s limited retaliatory strike has provided Iran with an off ramp to refrain from counterattacking.

U.S. crude oil and Brent finished out the week 3% lower despite the fact that Iran and Israel traded direct strikes against each other.Investors seem to believe that Israel's limited retaliatory strike gives Iran an off ramp to refrain from counterattacking.

In fact, U.S. oil futures closed Friday at $83.14 a barrel which was the lowest settlement price since late March, days before the current spiral of escalation began with Israel's strike on an Iranian diplomatic compound in Damascus, Syria on April 1. The market has essentially erased the risk premium associated with the Iran-Israel tensions after traders bid up prices last week on war fears."Traders aren't buying that either Israel or Iran is actually interested in escalating the tensions and are merely engaged in largely symbolic, face-saving exercises," said Manish Raj, managing director at Velandara Energy Partners.

But Iran intended for the missiles and drones to do significant damage, said Tom Donilon, who served as former President Barack Obama's national security advisory. The Islamic Republic simply did not anticipate that the coalition's air defenses would prove so effective at shielding Israel, Donilon said.

 

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