Oil prices surge more than 7% on heels of Israeli strikes

Crude futures jumped as much as 13% Thursday evening after Israel launched airstrikes against Iran without U.S. support, drawing concerns over the supply outlook from the oil-rich Middle East region.

Global benchmark Brent futures with August delivery surged 7.05% to $74.25 per barrel at 07:17 a.m. London time. The U.S. West Texas Intermediate contract with July expiry was last up 7.76% at $73.32 per barrel.

Israel launched a "targeted military operation" against Iran's nuclear and ballistic missile program, Israel Prime Minister Benjamin Netanyahu said in an address. Israel hit Iran's main enrichment site at Natanz, its leading nuclear scientists, and struck the heart of its ballistic missile program, Netanyahu said.

"This operation will continue for as many days as it takes to remove this threat," Netanyahu said.

The International Atomic Energy Agency said no increase in radiation levels was observed at the Natanz site following the attack as of Friday morning, while the Isfahan nuclear site was not impacted.

U.S. Secretary of State Marco Rubio made clear that Israel had taken "unilateral action against Iran" without U.S. support. Rubio warned Iran against targeting U.S. interests.

"We are not involved in strikes against Iran and our top priority is protecting American forces in the region," Rubio said in a statement. "Israel advised us that they believe this action was necessary for its self-defense."

Oil prices year-to-date

Israel's Defense Minister Israel Katz declared a special state of emergency in Israel in anticipation of Iran launching a missile and drone attack in retaliation.

Iranian state media also reported that Hossein Salami, commander-in-chief of Iran's Revolutionary Guards Corps [IRGC], was killed in the strikes.

At risk for oil markets is supply from both Tehran and other regional players that could be drawn into the conflict. Iranian production stood at 3.305 million barrels per day in April, according to OPEC's Monthly Oil Market Report of May, which compiled the assessments of independent analyst sources.

Oil investors are now concerned that Iran will retaliate by attacking either Israeli or American targets, leading to a major military escalation and a potential oil supply disruption, said Andy Lipow, president of Lipow Oil Associates.

"Iran knows full well that President Donald Trump is focused on lower energy prices," Lipow told CNBC, adding that actions by Iran affecting Middle Eastern oil supplies and consequently raising gasoline and diesel prices for Americans are politically damaging to the U.S. president.

The oil markets have largely been shrugging off geopolitical risks for the last year, so these recent developments are a "wake-up call" that these risks are more "tangible and imminent" than many expect, said Saul Kavonic, head of energy research at MST Marquee.

"But the attacks will see some form of retaliation, which could easily - even if unintentionally - spiral out of control," said Kavonic, who cautioned that Thursday's airstrikes may also embolden hardline elements in Iran that see further escalation become more likely.

Oil markets have been "alarmed" by reports of the latest hostilities, Barclays analysts said in a Friday note, stressing the "worst case outcome is far from being in the price" and flagging uncertainty lingers over whether "Saudi Arabia or other regional players supported Israel in these attacks."

Tehran and Riyadh have had a storied relationship of tensions, but agreed to revive ties in a China-brokered deal in March 2023.

The rising Middle East tensions have raised concerns that Iran could leverage the Strait of Hormuz, a key chokepoint connecting the Persian Gulf and the Gulf of Oman, through which one fifth of the world's oil supply passes.

While the Israeli operation is more significant than what has been seen in a long time, there has been no direct targeting of Iranian oil production or export facilities, which means that Tehran can continue exporting oil, said Ellen Wald, co-founder of Washington Ivy Advisors.

"For Iran, there really is no net benefit to trying to impede the passage of oil through the Strait of Hormuz," Wald said, explaining that Iran will be retaliated against if it attempted to do so.

Iran's ability to wholly physically block the Strait of Hormuz is also debatable. While vessels do traverse through Iranian waters, they can still be diverted into UAE and Omani waters, Wald said. "While there would be a period of disruption, it's not likely to last all that long."

Additionally, Wald cautioned that a spike in oil prices from closing the Strait of Hormuz may bring about economic pressure from Iran's largest oil customer: China.

"China does not want the flow of oil out of the Persian Gulf to be disrupted in any way, and China does not want the price of oil to rise. So they're going to bring the full weight of their economic power to bear on Iran," she added.

"I don't think we're looking at anything as severe as when Russia invaded Ukraine. It's just not that significant a threat to oil supplies," she said.