Oil prices fell on Monday as market participants dialed back risk premiums following Iran's weekend attack on Israel that the Israeli government said caused limited damage., Reuters reported.
Brent futures for June delivery fell 50 cents, or 0.5%, to $89.95 a barrel by 0630 GMT, while West Texas Intermediate (WTI) futures for May delivery were down 52 cents, or 0.6%, at $85.14 a barrel.
"An attack was largely priced in the days leading up to it. Also the limited damage and the fact that there was no loss of life means that maybe Israel's response will be more measured," said Warren Patterson, head of commodities strategy at ING.
"But clearly, there is still plenty of uncertainty and it all depends on how Israel now responds."
As Iran currently produces over 3 million barrels per day (bpd) of crude oil as a major producer within the Organization of the Petroleum Exporting Countries (OPEC), supply risks include more strictly enforced oil sanctions and that an Israeli response could involve targeting Iran's energy infrastructure, ING also said in a separate client note on Monday.
The bloc said on Tuesday it would investigate subsidies received by Chinese suppliers of wind turbines destined for its countries. Chinese Foreign Ministry spokesperson Mao Ning speaking on Wednesday.
If there was significant supply loss, however, the U.S. could release further crude oil from its strategic petroleum reserves, while OPEC has more than 5 million bpd of spare production capacity, it said.
"If prices were to rally significantly on the back of supply losses, one would imagine that the group would look to bring some of this spare capacity back onto the market. OPEC will not want to see prices going too high given the risk of demand destruction," ING said in the note.
Oil benchmarks had risen on Friday in anticipation of Iran's retaliatory attack, touching their highest levels since October.
Analysts were widely expecting at least a short-lived rally in prices this morning, but said that more significant and longer-lasting price effects from the escalation would require a material disruption to supply, such as constraints on shipping in the Strait of Hormuz near Iran.
Analysts at Citi Research said prolonged tensions through the second quarter this year have largely priced oil at $85-$90 per barrel. As the market has been broadly balanced in supply and demand throughout the first quarter, any de-escalation could see prices falling back quite sharply to the high $70s or low $80s per barrel range.