Oil prices saw a notable decline early this week, as geopolitical tensions appeared to ease following Israel’s counterattacks on Iran. According to Rory Johnson from Commodity Context, the initial market reaction to Israel’s more focused strikes, which avoided nuclear and oil infrastructure, led to a sharp pullback in flat prices. Despite some recovery midweek, contracts failed to sustain gains and ended roughly $3 per barrel lower week-on-week.

Johnson explained that the easing risk premium, triggered by Israel’s targeted military actions, led many market participants to unwind their upside hedges. This resulted in speculative selling, further dampening crude futures. However, by Friday, both Brent and WTI futures curves remained backwardated, signaling persistent supply concerns despite the price drop.

Timespreads followed a relatively flat trajectory, mirroring the broader movement in flat prices. Despite the geopolitical overhang, backwardation in Brent and WTI futures highlights continued tightness in the market, with expectations of constrained supply playing a key role.

From an inventory perspective, data released during the week offered a bullish signal. Significant draws were reported across major storage hubs, including the United States, ARA (Amsterdam-Rotterdam-Antwerp) Europe, and Singapore. These declines in stockpiles outpaced seasonal averages, suggesting strong demand and highlighting ongoing supply challenges.

In refined products, the market response was mixed. Diesel crack spreads surged as falling inventories and weak European distillate shipments put upward pressure on prices. Conversely, gasoline margins remained seasonally weak, reflecting softer demand trends typical at this time of year.

Positioning data further underscored the market’s bearish sentiment. Speculators were net sellers of crude futures and options through Tuesday, driven by the dip in flat prices. However, Johnson noted that the market now appears oversold, suggesting a potential rebound in the near term.

Meanwhile, geopolitical risks remain a wildcard. Israel’s strikes may not have had the dramatic impact some hedged for, but the risk of further escalation persists. Iran is reportedly preparing a new counterattack, which could reignite oil market volatility.

On the broader horizon, Johnson raised questions about the upcoming U.S. presidential election's influence on the oil market, especially as political shifts could alter energy policies. Additionally, concerns about non-OPEC supply growth have been amplified by disappointing production data out of Brazil, casting doubt on the sustainability of future output from key non-OPEC producers.

As the week concludes, all eyes remain on Middle East developments and their potential to disrupt oil supply, while market fundamentals suggest a possible rebound from oversold conditions.