Oil steadies after surge following reported Israeli attack on Iran

By Deep Kaushik Vakil

(Reuters) -Oil steadied on Friday after prices spiked earlier on reports that Israel had attacked Iran, as market fears of a major escalation to hostilities in the Mideast appeared to ease and a build-up of global oil stocks weighed.

The benchmark contracts surged more than $3 before dipping back down. At 0845 GMT, Brent futures were up 14 cents, or 0.2%, at $87.25 a barrel. The most active U.S. West Texas Intermediate contract climbed 23 cents, or 0.3%, to $82.96 per barrel.

Israel launched an attack on Iranian soil on Friday, sources told Reuters, the latest tit-for-tat exchange between the two countries that threatens to drag the region deeper into conflict.

Iranian media reported explosions, but an Iranian official told Reuters those were caused by air defence systems. State media said three drones over the central city of Isfahan had been shot down.

“The fear is that we are on an escalating tit-for-tat retaliatory path. … The hope is that the retaliatory strikes will be fading in magnitude and then fizzle out,” said Bjarne Schieldrop, commodities analyst at SEB Research.

“The oil market is nonetheless concerned as there is too much oil supply at stake.”

Last weekend Iran launched hundreds of drones and missiles in a retaliatory strike after a suspected Israeli attack on its embassy compound in Syria. Most of the drones and missiles were downed before reaching Israeli territory, with minimal damage and casualties.

Investors have been closely monitoring Israel’s reaction to the April 13 Iranian drone attacks. The geopolitical risk premium in oil prices had been unwinding this week on the perception that any Israeli retaliation to Iran’s attack would be moderated by international pressure.

Meanwhile a rise in global oil storage weighed on prices.

“Visible oil stocks globally have steadily risen, which seems counterintuitive given strong price action recently,” Citi analysts wrote in a note late on Thursday, citing a build of about 1 million barrels per day in crude stocks over the first quarter.

The U.S. also announced sanctions on Iran, an OPEC member, targeting its unmanned aerial vehicle production after the country’s drone strike on Israel. The sanctions on Iran, however, exclude its oil industry.

(Reporting by Andrew Hayley in Beijing, Florence Tan in Singapore and Laila Kearney in New York; Editing by Sonali Paul and Tom Hogue, Kirsten Donovan and Sharon Singleton)