Crude oil spikes 3% on fears Iran preparing to directly attack Israel

U.S. crude oil prices rose 3% on Tuesday, as the U.S. warned of a possible imminent attack by Iran against Israel.

White House and Defense Department officials told NBC News that the U.S. “has indications that Iran is preparing to imminently launch a ballistic missile attack against Israel.”

“We are actively supporting defensive preparations to defend Israel against this attack. A direct military attack from Iran against Israel will carry severe consequences for Iran,” a senior White House official told NBC.

Here are Tuesday’s energy prices at around 10:30 am ET:

• West Texas Intermediate November contract: $70.28 per barrel, up $2.11, or 3.1%.
• Brent December contract: $73.74 per barrel, up $2.04, or 2.85%.

The U.S. Embassy in Jerusalem on Tuesday directed employees and their families to “shelter in place until further notice.”

Tensions in the Middle East have dramatically escalated over the past week, as Israel has pounded the Iran-backed militia Hezbollah with airstrikes, killing the group’s leader Hassan Nasrallah. Israel dispatched ground forces into southern Lebanon on Tuesday.

Oil market and geopolitical analysts have repeatedly warned this year that an Israeli incursion into Lebanon could be the tripwire that leads to a regional war with Iran, increasing the risk of crude supply disruptions.

The impact on the oil market will depend on the “scope and damage” caused by an Iranian attack, which in turn will drive Israel’s response, said Bob McNally, president of Rapidan Energy.

Iran and Israel came to blows in April but ultimately backed away from a full-blown conflict. Iran launched hundreds of ballistic missiles and drones against Israel, after the Netanyahu government struck an Iranian diplomatic compound in Syria.

The U.S., Israel and other allies foiled Iran’s April missile attack, giving the Netanyahu government room for a small retaliatory strike in Iran that did not lead to a further cycle of escalation.

McNally said “the crude risk premium should quickly dissipate” if there is a repeat of “April’s failed Iranian and restrained Israel exchanges.”

The analyst cautioned, however, that Israel has increasingly adopted a “three eyes for an eye” approach to attacks from regional enemies.

“If Iran attacks and causes damage, then the escalatory cycle could leg up quicker to sustain and even increase a geopolitical risk premium,” McNally said.