Oil prices have experienced a slight decrease for the third day in a row, after reaching a six-month record. Investors have seemingly shrugged off fears of a wider Middle East war disrupting supplies. Brent crude, the international benchmark, fell by 3.03% to $87.29 per barrel for June.
Meanwhile, West Texas Intermediate, the U.S. marker, dropped by 3.13% to $82.69 a barrel for May. On Friday, oil prices soared to their highest level since October at $92.18 due to speculation that Iran would retaliate to the blast of its embassy in Damascus by Israel.
However, the forewarning of Iran's missile and drone attack on Saturday night allowed Israel - with the help of its allies - to intercept the majority of the 300 aerial drones and missiles aimed at it. Despite world leaders urging restraint, traders remain on high alert as Israel weighs up the size and scale of its response to Iran's strike.
According to Michael Tamvakis, a Commodity Economics and Finance Professor at Bayes Business School, City University London, the extent of Israel's retaliation will determine its impact on oil markets and the global economy. Since Iran declared that it would respond again if Israel retaliates, it is a "tit for tat" situation.
Tamvakis believes that the unprecedented strike on Israel had a subdued effect on oil prices as it inflicted less damage than expected. He said, "It was more a sign of relief in the market... because although it was an extensive attack, it was only to one target."
Analysts predict that although the market has anticipated a measured response from Israel, an escalation of the conflict could lead to an overwhelming surge in oil, fuel, and energy prices. If a broader regional war erupts in the oil-rich area, it could disrupt shipping through the Strait of Hormuz, where over one-quarter of global maritime oil trade passes daily.
Tamvakis warned that under these circumstances, Iran would have the means to target oil tankers that flow through the strait with drones, missiles, or submarines. Such an escalation could bring major turmoil to the market and affect oil transportation from the world's largest producers.
It could lead to international shipping becoming reluctant to pick up cargo because of the sudden jump in insurance premiums. Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), generating approximately 3% of the world's output.
The US is considering further sanctions against Iran that could penalize the country's oil exports following the weekend air assault. Tamvakis explained that while Turkey and the Asia Pacific are the primary purchasers of Iranian oil, any blows to Iran's oil production could lift global prices.
"If you remove these supplies from the market, there will be a shortfall, and the price will increase," he added.
