(Reuters) Oil prices surged 4%, recouping some of last week's steep losses, as military clashes between Israel and the Palestinian Islamist group Hamas ignited fears that a wider conflict could hit oil supply from the Middle East.
Brent crude was up $3, or 3.6%, to $87.59 a barrel. U.S. West Texas Intermediate crude was at $85.89a barrel, up $3.15 or about 3.8%. At their session highs, both benchmarks spiked by more than $4, or over 5%.
Last week, oil prices had the biggest weekly decline since March. Brent fell about 11% and WTI retreated more than 8% as a darkening macroeconomic outlook intensified concerns about global demand.
"(An) attack on Israel by Hamas may push the region to war, increasing geopolitical risk bid into crude," said Tudor Pickering and Holt analyst Matt Portillo.
Oil prices surge on worries of escalation in Middle East conflict
On Saturday, Hamas launched the largest military assault on Israel in decades. Israel retaliated with a wave of air strikes on Gaza.
Israel's port of Ashkelon and its oil terminal have been shut in the wake of the conflict between Israel and Islamist group Hamas, shipping and trade sources said.
The eruption of violence threatens to derail U.S. efforts to broker a rapprochement between Saudi Arabia and Israel, in which the kingdom would normalize ties with Israel in return for a defense deal between Washington and Riyadh.
Saudi officials reportedly on Friday told the White House that they were willing to raise output next year as part of the proposed Israel deal.
Goldman Sachs said that while it does not see any immediate major effect on near-term oil market inventories from the attacks, the conflict reduced the likelihood of normalization of Israel's relations with Saudi Arabia, and the associated boost to Saudi production over time.
Riyadh and Moscow have agreed to a combined 1.3 million barrel per day (bpd) voluntary cut until the end of 2023 and any new disruption would exacerbate supply tightness as most analysts expect markets to be in a deficit in the second half of the year.
Analysts suggested the implications of the conflict could include a potential slowdown in Iranian exports, which have grown significantly this year, despite U.S. sanctions.
Iran's production has risen by close to 600,000 barrels per day during the past year while crude stored on and offshore has been sold into market, mitigating some of the tightness being orchestrated by Saudi Arabia and Russia, said Saxo Bank's Ole Hansen.
"If the U.S. were to judge that Iran is involved in Hamas' attack, this could lead it to 'turn the screws' on Iran's oil exports by enforcing sanctions more strictly," said Caroline Bain, chief commodities economist at Capital Economics.
The conflict is likely to lead to higher volatility and speculation in oil markets, the CEO of Brazil's Petrobras said.
On the demand side, major international air carriers have suspended or scaled back flights to or from Tel Aviv after the attack.
A widening conflict could keep oil prices elevated and potentially bolster inflation, analysts said, forcing rate hikes by central banks that could dampen oil demand.
