Oil Prices Plunge 7.2% After Iran Missile Strike

On Monday, oil traders responded swiftly to Iran's missile strikes on a U.S. military base in Qatar, opting to sell off crude rather than driving prices up. This reaction came just three hours after a message from Trump on Truth Social, urging traders to avoid panicking and to refrain from inflating oil prices. His directive seemed to have been heeded by the market, as prices began to fall shortly after the missile launch.

The first missile strike occurred around 5:30 pm Doha time. Within seven minutes, Brent crude started to decline. By 7:30 pm, the price had plummeted to $71.48, marking a 7.2% loss—the steepest one-day drop in nearly three years. This rapid decline caught many observers off guard, as the geopolitical tension typically drives up oil prices. However, traders appeared to have anticipated the situation, understanding that the U.S., Israel, and Iran were not escalating into full-blown war.

Analysts and traders closely monitored open-source intelligence and social media platforms like Twitter to stay informed. Satellite images of the Al Udeid air base in Qatar, which is home to 10,000 U.S. troops, showed the base to be largely empty days before Iran's response. This observation suggested that the strike was more symbolic than a serious threat to oil infrastructure. Additionally, Iran had been increasing its crude output during the conflict, as it struggled to refine enough oil domestically. This ensured that oil continued to flow, mitigating any potential panic in the market.

Last week's events further illustrated this pattern. When Israel targeted Iranian gas and fuel sites, oil prices initially spiked by 5.5%. However, as it became clear that Tehran was seeking a peaceful resolution, the price increase quickly dissipated. The market's primary concern was whether Iran would attack tankers in the Strait of Hormuz, a critical passage for Gulf oil exports. Traders, however, did not anticipate a significant oil shortage and acted swiftly to sell off any price spikes.

This behavior is not new; geopolitical tensions often lead to temporary price spikes, but if the threat is deemed minimal, traders quickly sell off their positions. One oil executive noted that this situation differs from the Ukraine-Russia conflict, where trade flows needed to be reoriented for an extended period. In this case, the market was focused on selling any price increases that did not reflect a genuine threat to supply.

Even before the conflict, market sentiment was skeptical about oil prices holding up. The Opec+ cartel had increased output, and American shale drillers had flooded the market with additional supply. Demand remained soft, and the White House did not tap into the Strategic Petroleum Reserve, confident in having alternative sources of spare barrels in case of a serious outage. When Donald Trump, now back in the White House, brokered a ceasefire between Iran and Israel, Brent crude fell another 6.1% on Tuesday, settling just above $67—lower than pre-war levels.

Another factor contributing to the price drop was the role of derivatives. Before the conflict began, oil producers had purchased put options, which pay out if prices fall. To hedge these positions, dealers started selling futures. As Brent crude prices dropped on Monday, these put options moved closer to being exercised, triggering further selling and bringing prices well below their levels from a week prior.