Oil prices retreat despite ongoing Israel-Iran conflict

Investing.com--Oil prices fell Monday, handing back earlier gains as the ongoing conflict between Israel and Iran has so far left oil production and export facilities unaffected, diluting concerns of supply disruptions in the Middle East. 

At 08:30 ET (12:30 GMT), Brent oil futures for August fell 1.3% to $73.32 a barrel, and West Texas Intermediate crude futures dropped 1.2% to $70.46 a barrel.

Both benchmarks jumped more than $4 a barrel earlier in the day before giving back gains. They settled 7% higher on Friday, having surged more than 13% during the session to their highest levels since January.

Israel-Iran conflict worsens

Israel and Iran launched a volley of strikes against each other over the weekend, with leaders from both sides signaling little intent to deescalate. 

Israel had first struck Tehran on Friday, and was also seen attacking Iran’s nuclear facilities. Tehran retaliated with missile strikes against major Israeli cities, with several missiles seen hitting Tel Aviv. 

The latest conflict pushed up bets on more restrictions on Iranian oil, and also sparked concerns over disruptions in the Strait of Hormuz, which is a major shipping channel for Asia and Europe. 

"In a scenario where we see continued escalation, there’s potential for disruptions to shipping through the Strait of Hormuz, which is the biggest fear for the oil market. This would impact oil flows from the Persian Gulf, and prices could soar further. Almost a third of global seaborne oil trade moves through the Strait of Hormuz," said analysts at ING, in a note.

Iran is the third biggest OPEC producer, despite U.S. sanctions, and pumps around 3.3 million barrels a day of crude oil and exports roughly 1.7 million barrels a day.

"The loss of this export supply would wipe out the surplus that was expected in the fourth quarter of this year," said ING. "However, OPEC sits on 5m b/d of spare production capacity, and so any supply disruptions could prompt OPEC to bring this supply back onto the market quicker than expected."

Central bank barrage 

While the Israel-Iran conflict is likely to drive oil’s performance in the near-term, focus this week is also on a barrage of major central bank meetings. 

The Bank of Japan is set to meet on Tuesday and is likely to leave interest rates unchanged, although traders will be watching for any more economic cues.

The U.S. Federal Reserve is also set to keep rates unchanged on Wednesday, with focus squarely on whether the central bank will signal any more rate cuts amid softening inflation and a cooling economy. 

China’s central bank is set to decide on its benchmark loan prime rate later this week, while the Swiss National Bank and the Bank of England also meet this week.

Net long positions grow 

The latest positioning data showed that speculators increased their net longs in ICE Brent contracts by 29,159 lots for a second consecutive week to 196,922 lots, the highest bullish bets since the week ending on 1 April.

"This was driven predominantly by new longs entering the market and the liquidation of short positions," ING said.

Similarly, in the Nymex WTI contract, speculators boosted their net long by 16,056 lots for the second week straight to 179,134 lots over the reporting week, the highest since the week ending on January 28. 

Ambar Warrick contributed to this article