Global oil prices whipsawed Friday as investors weighed the impact of a reported Israeli missile strike on Iran that could escalate tensions in the region, increasing the risk of supply disruption through one of the market's key delivery hubs.
Reports suggest Israel carried out a 'limited' missile strike on Iranian military targets late Thursday, in retaliation for Tehran's unprecedented attack on Israeli soil earlier this month. The strikes, while highly anticipated, rattled global markets and briefly lifted global oil prices north of $90 per barrel.
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Both sides appear to have downplayed the event, however, with Iran describing the attacks as a failed effort from "infiltrators" and Israel thus far refusing to claim official responsibility.
That, as well as the fact that no oil installations appear to have been damaged in the strikes, allowed global prices to ease in the aftermath, although investors remain on high alert for any reprisal efforts from Iran or Israel.
"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," said ING's chief commodity strategist Warren Patterson.
Brent futures contracts for June delivery, the global pricing benchmark, opened lower before trading higher, ranging between $86.19 and $87.45.
WTI contacts for May delivery, which are tightly linked to U.S. gasoline prices, have ranged between $81.80 and $86.28 after trading at $85 a barrel in the overnight session.
Oil prices have risen more than 20% so far this year, powered in part by a resilient global economy, improving demand from China, and the ongoing OPEC cartel production cuts, which are removing more than 2 million barrels of crude from the market each day.
Iran, which is OPEC's fourth-largest producer, has been under U.S. sanctions in terms of oil exports for a number of years over its links to terror groups in the region and its pursuit of a nuclear weapons program.
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Russia's invasion of Ukraine in 2022, however, has meant that some of those sanctions have gone unenforced, allowing Iran to boost its overall crude output from 2.5 million barrels per day to around 3.5 million as of last month.
That's meant that any attack on Iran now has a greater impact on global supplies, while any spillover of the region's conflict into the Strait of Hormuz, where more than 20 million barrels of crude, around a fifth of all global supplies, travels each day.
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"The potential impact would dwarf the disruptions we have seen in the Red Sea in recent months, given the volume of oil that flows through the Strait and also due to the fact that there is no alternative route for the bulk of these oil exports," said ING's Patterson.
Record U.S. oil production is also easing some of the West's broader supply concerns. Domestic drillers pump 13.1 million barrels each day, up from around 12.5 million over the same period last year.
Domestic crude stockpiles are also rising, according to recent Energy Department data. Last week, inventories were up by 2.7 million barrels to around 460 million barrels.
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That's likely to leave oil prices trading inside a tight recent range of between $85 and $90 per barrel over the near term. This level is also likely to stoke headline inflation pressures as traders monitor weekend developments heading into Monday's Passover observances.
"Overall, most of the five-dollar range seen this past week has been driven traders attempt to quantify the level of risk premium needed to reflect heightened tensions but with no impact on supply," said Saxo Bank's head commodity strategist Ole Hansen. "Expect prices to bid ahead of the weekend."
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