Oil prices rose on Friday but posted a weekly decline after Iran downplayed the severity of Israel's attacks and denied any damage on the ground.
Brent, the benchmark for two thirds of the world’s oil, rose 0.21 per cent to close at $87.29 a barrel.
West Texas Intermediate, the gauge that tracks US crude, surged 0.5 per cent to settle at $83.14 a barrel.
Air defence systems in the Iranian city of Isfahan were activated overnight against a suspected drone attack, with three explosions heard near an army base north-west of the city, Iranian state media reported on Friday.
US officials confirmed Israel had carried out military operations against Iran in retaliation for the April 13 barrage of hundreds of missiles and drones that Tehran fired at Israel. Oil prices rose by 3 per cent following the incident on disruption concerns.
However, Iranian officials have played down the incident and signalled that Tehran had no plans for retaliation.
“Oil prices jumped after the attack, but have calmed down for now. However, geopolitical tensions persist as a key risk factor,” said Jorge Leon, senior vice president at Rystad Energy.
The Norway-based consultancy said the fair price for a barrel of oil based solely on fundamentals would be $83, indicating a geopolitical premium of about $4 at current Brent crude prices.
“The near future is likely to see continued volatility in the oil market due to these geopolitical factors,” Mr Leon said.
Last Saturday, Iran fired more than 300 drones and missiles at Israel in retaliation for the killing of senior members of its Islamic Revolutionary Guard Corps in an air strike on a consulate in Damascus on April 1.
It marked the first direct attack by Tehran on Israel rather than through proxies in Lebanon, Syria and other locations. Iran also seized a container ship with links to Israel in the Arabian Sea.
Analysts have said that while a potential disruption of Iranian crude shipments would affect oil prices, the biggest risk to energy markets arises from a potential blockage of the Strait of Hormuz, the world’s most important oil corridor.
About 30 per cent of global oil trade transits through the Strait of Hormuz, with 70 per cent going to Asia, according to the International Energy Agency.
Tehran has indicated it could close the maritime route if necessary.
“Crude oil continues to ebb and flow with the news from the Middle East, where tit-for-tat strikes between Israel and Iran so far have left the impression that both countries want to show strength without risking attacks that could provoke an all-out war,” Ole Hansen, head of commodities strategy at Saxo Bank, said.
“This past week, most of the near five-dollar range in Brent and WTI was primarily driven by traders struggling to quantify the appropriate risk premium needed to reflect a Middle East crisis that is unlikely to lead to an actual supply disruption.”
Higher oil prices could prompt global central banks to rethink plans to cut interest rates.
On Tuesday, the Federal Reserve chairman Jerome Powell said he expected recent data to delay the timing of US interest rate cuts, as figures indicated that the US central bank's efforts to restore price stability had stalled.
The Fed has held its target range between 5.25 per cent and 5.5 per cent since the summer and is now considering the timing of cutting interest rates.
Meanwhile, the US has reimposed sanctions on Venezuela’s oil sector in response to what it said was President Nicolas Maduro's failure to meet his election commitments.
The US Department of State said that the South American country had not fully met the commitments made under the Barbados Agreement.
The deal aimed to lay the groundwork for a free, fair and internationally monitored presidential election in 2024, involving both the government and opposition leaders.
Rystad Energy expects Venezuela’s oil production to plateau at about 910,000 barrels per day this year, before gradually declining to 890,000 bpd next year.
“In the case that sanctions were not reimposed, our updated view was that production could have increased steadily to 1.1 million bpd by the end of next year,” the consultancy said.
