Oil prices spike as Iran strikes back at Israel

Brent and WTI crude futures settle around $74 a barrel after spiking more than 13% in immediate aftermath

Oil prices spiked on Friday, reaching their highest level in nearly five months, as Tehran launched retaliatory attacks following Israel's air strikes on Iran.

Brent and West Texas Intermediate (WTI), the gauge that tracks US crude, had surged more than 13 per cent before settling at around 8 per cent higher.

Brent closed 7.02 per cent higher at $74.23 a barrel, while WTI crude jumped 7.26 per cent to $72.98 per barrel. Both benchmarks posted weekly gains.

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Colby Connelly, a senior fellow at the Middle East Institute in Washington, said that while markets dislike uncertainty there is no clear sign of disruption yet.

“They're hovering just below $75 a barrel right now,” he said during a briefing. “That's down from a $78-per-barrel high a number of hours ago, which shows that … the markets are not seeing the situation as continuously deteriorating.”

A price of more than $70 for Brent is unlikely to be sustained after the “peak summer demand”, according to Ole Hansen, head of commodity strategy at Saxo Bank.

“It's an explosive situation,” Vandana Hari, chief executive of Singapore-based Vanda Insights, told The National. “It could evolve into a bigger war that disrupts Middle East oil supply, which is what crude is pricing in partially, though it’s impossible to map out all the potential scenarios with corresponding probabilities.

“Or, the situation could be defused quickly, as we saw in April and October last year, when Israel and Iran struck each other directly. If it ends up being symbolic tit-for-tat strikes and a quick de-escalation like last year, crude will sell off just as quickly.”

Echoing similar thoughts, Giovanni Staunovo, a strategist at Swiss bank UBS, said the reaction of the crude oil price, a spike, is a clear indication that market participants are concerned about supply losses.

“So far, oil facilities have reportedly not been hit. A risk premium in oil will stay until it becomes clearer how Iran and the US will react to Israel's attacks. If there are no supply disruptions the risk premium tends to fade,” he told The National.

Iran launched a barrage of missiles against Israel on Friday, after supreme leader Ayatollah Ali Khamenei vowed to strike back after Israel's attack against the country overnight.

“A big error, a mistake, and the consequences of it will make it miserable, God willing,” Mr Khameni said.

Meanwhile, Israel conducted another strike on Iran's nuclear facilities late on Friday, targeting infrastructure that enriches uranium.

Iran also said it was withdrawing from the sixth round of nuclear talks that were due to take hold in Oman on Sunday. US special envoy Steve Witkoff was expected to participate in those discussions.

The UAE, Saudi Arabia, Qatar and Oman condemned Israel's attack on Iran.

Oil price volatility intensifies

Geopolitical risks, particularly escalating tension involving Iran, Israel and the US, along with threats to key shipping routes such as the Strait of Hormuz, continue to fuel volatility and the potential for sharp price rises, Mr Hansen said.

“Some analysts are warning of possible rises towards $100 a barrel in extreme scenarios,” he told The National.

However, de-escalation in regional conflicts could bring oil back below $70 a barrel, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank. “The other scenario is broader escalation, potentially pushing oil prices towards $90 to $100 per barrel – hopefully only temporarily,” she added.

Liquefied natural gas flows could also be hit if tension disrupts shipping in the Strait of Hormuz, Ms Ozkardeskaya added. About one fifth of global LNG passes through the waterway.

“So far, there's no major price action on that front. Let’s hope tensions ease before broader disruptions emerge,” she said in a note on Friday.

Temporary shutdown of Israel's biggest gasfield

Israel's Energy Ministry on Friday ordered its biggest natural gasfield, Leviathan, to be shut down temporarily. The country is also expected to declare a state of emergency in the natural gas sector, Bloomberg reported.

Leviathan is a leading exporter to Egypt, while the Karish gasfield serves the domestic market.