U.S. crude oil prices tumbled on Monday, marking their steepest single-day drop in over two years, as markets reacted to Israel’s decision to avoid targeting Iran’s critical energy facilities in a recent military strike.

Futures for the global benchmark, Brent crude, slid 5.94% to $71.53 per barrel as of 9:26 a.m. ET, while U.S. West Texas Intermediate (WTI) dropped 6.26% to $67.29 per barrel. The decline put U.S. crude on track for its worst day since July 2022, when prices fell nearly 8%.

The selloff follows Israel’s response to Iran’s October 1 missile attack with targeted strikes on Iranian military sites in three provinces. While Iranian reports indicated that four soldiers were killed, the attack did not impact energy, nuclear, or civilian infrastructure, according to Iran’s official news agencies. The state-run Islamic Republic News Agency stated that damage was “limited,” and Iran’s oil network remains operational, easing previous fears of broader supply disruptions.

Avoidance of Energy Targets Eases Market Tensions

Energy markets had braced for potential Iranian crude disruptions, with fears of escalating tensions after the October 1 missile offensive. Iran, a crucial supplier accounting for around 4% of global oil output, is a critical player in the international energy market, according to U.S. Energy Information Administration data.

“The market was previously pricing in a risk premium for a potential hit on Iranian energy facilities, but that premium is now being reconsidered,” said Andy Lipow, president of Lipow Oil Associates. He added that the current outlook suggests Brent crude could struggle to reach $80 per barrel by year’s end.

Citi analysts similarly cut their forecast for Brent prices by $4, projecting an average of $70 per barrel over the next three months. “The Israel-Iran conflict, while significant, is not yet affecting oil supply directly,” the bank stated in a Monday note.

Amid these dynamics, the oil market is contending with a potential global oversupply situation. Production has been rising not only in major countries like the U.S., Canada, and Brazil but also among smaller players like Argentina and Senegal.

Analysts Caution on Future Risks

Despite Monday’s relief rally, some analysts caution that further escalations between Israel and Iran could see crude prices spike again. Saul Kavonic, an energy analyst with MST Marquee, pointed out that while Israel’s restraint has calmed immediate market fears, risk premiums could return if tensions heighten.

“If Iran chooses to retaliate, we may see another round of price volatility,” Kavonic said, emphasizing that the broader conflict trajectory remains uncertain.

In a recent cabinet meeting, Iranian President Masoud Pezeshkian vowed a “proportionate response” to defend Iran’s sovereignty, underscoring the potential for renewed hostilities.

Oil Market Eyes Potential Ceasefire Negotiations

Attention has now shifted to ongoing ceasefire talks between Israel and Iran-backed groups Hamas and Hezbollah, as well as U.S.-led efforts to de-escalate regional tensions. Vivek Dhar, head of mining and energy commodities research at Commonwealth Bank of Australia, suggested that while Israel’s measured response may cool immediate market concerns, an enduring ceasefire remains elusive.

Meanwhile, Rapidan Energy founder Bob McNally warned that Israel’s readiness to target energy and nuclear sites if necessary means oil markets will likely remain volatile.

Looking Ahead

Monday’s selloff reflects cautious optimism that the Israel-Iran confrontation will avoid a significant energy impact, at least in the near term. However, with the broader Middle East tensions persisting, analysts believe the oil market is far from stable, with volatility likely as new developments unfold.