Oil prices fell after Israel refrained from attacking Iran's refineries

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Oil prices fell sharply on Monday after Israel's attack on Iran over the weekend signaled a measured response to the attack and avoided oil and nuclear facilities.

Brent crude futures, the international benchmark, fell as much as 5 percent to $71.99 a barrel in early Asian trading but later pared losses to trade at $72.83. West Texas Intermediate futures, the US benchmark, fell 3.2 percent to $68.56 a barrel.

The move came after Iran's Supreme Leader Ayatollah Ali Khamenei on Sunday hinted at a measured response to Israel's attack the previous day, refraining from making any direct threats of retaliation.

The US pressured Israel to avoid Iran's nuclear and oil facilities in retaliation for Iran's ballistic missile attack in early October. The conflict involving Israel, Iran and Iran-backed militants has raised concerns that the Middle East is being pushed towards an all-out war.

However, Iran's initial response was to play down the impact of the strike. The General Staff of the Armed Forces said on Saturday that Iran is committed to supporting the ceasefire in Gaza and Lebanon.

“Recent geopolitical tensions are no longer reflected in any geopolitical premium [in] The absolute level of oil prices where bearish supply/demand dynamics still dominate,” said Sophie Huynh, senior cross-asset strategist at BNP Paribas Asset Management. “At this stage, the market is still not pricing in any disruption in the Strait of Hormuz.”

Brent crude prices have risen in recent weeks on fears of supply disruptions.

Analysts at Goldman Sachs said last week that the market's focus was shifting from the Middle East conflict to the “risk of oversupply in 2025”, as OPEC members plan to unwind voluntary production cuts this year.

They added that in the run-up to the supply disruption, Saudi Arabia and the United Arab Emirates alone made up about 80 percent of the shortfall “between the two quarters.”

“The geopolitical risk premium of flat oil prices is limited because Israel-Iran tensions have not significantly affected oil supplies from the region and because spare capacity is high,” they wrote.