Oil Plummets On Easing Iran Fears, But Disruption Still Possible, Analyst Warns

But the IEA still believes an oil surplus is likely in 2025: File Image/Pixabay

Oil prices took a 4 percent nosedive on Tuesday, with investors still taking solace from an earlier media report claiming Israel wouldn't attack Iran's oil or nuclear facilities, and due to continued disappointing demand outlook.

Brent settled down $3.21, or 4.14 percent, at $74.25 per barrel, and West Texas Intermediate settled down $3.25, or 4.4 percent, at $70.58 per barrel.

Phil Flynn, senior market analyst at Price Futures Group Inc., said, "We're seeing an unwinding of the war premium we built up last week…it's not really about supply, it's about the risk to supply and demand."

But while Helima Croft, head of global commodity strategy at RBC Capital Markets, agreed that geopolitical risk has evaporated anon oil traders, she warned that if Israel follows its plan and strikes military targets in Iran that causes casualties, the Islamic Republic's response could lead Israel to escalate further – and a much-feared oil disruption would result anyway.

The other factor that has caused bearish sentiment of late – China's economic woes - continued on Tuesday with the publication of an International Energy Agency report showing that consumption in that country dropped by 500,000 barrels per day (bpd) in August, the fourth monthly decline in a row.

The IEA also touched on the Middle East situation, stating that "For now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizeable surplus in the New Year."

Also on Tuesday, Oilprice.com analyzed the recent oil price spike and found that "October saw a record-breaking number of trades, with AEGIS Hedging, a major player in U.S. oil and gas hedging, handling its highest number of transactions ever on October 3."

The news agency added that while geopolitical fears have eased, "market watchers suggest that another rally toward $80 per barrel could reignite producer interest in hedging."