Oil Climbs as Prospect of Israeli Response to Iran Fans Tensions

Oil gained as Israel vowed to respond to an unprecedented attack by Iran, keeping tensions elevated in the Middle East, Bloomberg reported.

Global benchmark Brent climbed toward $91 a barrel after a modest drop on Monday, while West Texas Intermediate was near $86. Top Israeli military officials said their country had no choice but to respond to Tehran’s weekend strike, even as European and US officials called for restraint.

Traders’ focus is now shifting to the nature and timing of the next Israeli move. Western and Arab nations are trying to convince Prime Minister Benjamin Netanyahu that an aggressive reaction to Iran’s assault would harm Israel’s interests. The Middle East accounts for about a third of global crude supply.

The possibility of a direct response from Israel “means that this uncertainty and tension will linger for quite some time,” said Warren Patterson, head of commodities strategy for ING Groep NV in Singapore. “The more escalation we see, the more likely we are to see oil supply from the region impacted.”

Oil has rallied this year, with OPEC+ supply cuts and elevated geopolitical risks in Russia and the Middle East lifting prices. Consumption has also been running at a good clip in leading economies, with data Tuesday showing China’s first-quarter growth beat expectations as oil demand expanded. In addition, there have been signs of strength in some products, including US gasoline.

Timespreads remain elevated, pointing to tight market conditions, while bullish call options, which profit from gains, are at a premium to opposing puts. Brent’s December-December spread — the gap between the contract for the final month of this year and next — has ballooned more than $6 a barrel in backwardation. That’s up from less than $3 in early January.

Oil’s advance — Brent is now almost 18% higher this year — has come despite a steady strengthening of the US dollar, with a Bloomberg gauge of the currency climbing to the highest level since mid-November. Typically, that can be a headwind for commodities including crude.