Oil Prices Surge as Israel Carries Out Airstrikes on Iran

Israel launched missile strikes against Iran in the early morning hours, a U.S. official told ABC News today.

The news was later confirmed by Iranian media, which said the country’s air defense system took down three drones over the city of Isfahan, according to Al Jazeera. Flights to three cities including Tehran and Isfahan were suspended, Iranian media also reported.

The news of the Israeli strike prompted a sharp spike in crude oil prices, which gained $3 per barrel earlier in the day.

"If these reports turn out to be true, fears over further escalation will only grow, as well as concerns that we are potentially moving closer towards a situation where oil supply risks lead to actual supply disruptions," ING’s commodity strategy head Warren Patterson said in a note.

Israel’s retaliation for Iran’s missile strikes last week was seen by most as a guarantee of escalation of the Middle East conflict since Iran had warned Tel Aviv that if it retaliates, so will Tehran in its turn and that retaliation would be on a greater scale than the missile strikes from last week. These developments were naturally seen as strongly bullish for oil prices.

Before the news broke of the Israeli attack, oil prices were set for a weekly decline as traders discounted the higher risk of an all-out war in the Middle East. Now, they might have to reconsider.

“Depending on the nature of strikes, we are moving closer toward a scenario where supply risks become a reality,” Warren Patterson said, as quoted by Bloomberg. “The market will likely have to start pricing in an even larger risk premium.”

Media reports note that the Isfahan province is home to several Iranian nuclear facilities, with Reuters noting that Iran had specifically warned the Israelis against targeting any of these.

By Irina Slav for Oilprice.com

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