Investing.com– Oil prices fell Friday, handing back the earlier sharp gains after Israel reported launched strikes against Iran, elevating the already fraught tensions in the Middle East.

At 08:50 ET (12:50 GMT), fell 0.5% to $86.65 a barrel, while dropped 0.3% to $82.47 a barrel.

Middle East tensions back in focus after Iran explosions

Both benchmarks had soared 3% earlier Friday after reports of missile strikes in Iran, with Iran’s Fars News Agency saying explosions were heard in Isfahan in central Iran, in parts of southern Syria and in parts of Iraq. ABC news reported that U.S. officials said Israel had retaliated against Iran.

Both contracts reversed a bulk of their losses for the week, but were still set to end the week mildly negative. 

Israel’s likely retaliation, around a week after Iran launched a missile and drone strike against Israel last week, which was in turn retaliation for an alleged Israeli strike on an embassy in Damascus, marks an escalation in the Middle East conflict.

That said, the quick surrender of early gains suggests the market doesn’t believe this to be a severe escalation, with Tehran stating that nuclear facilities were undamaged.

Iran recently said it could reconsider developing a nuclear weapon if Israel attacked the country’s nuclear sites, which it said have so far been used only for peaceful, power-generating purposes. 

UN reports recently showed Iran was enriching uranium up to 60%, which was more than levels required for commercial power generation. But it was also below the 90% enrichment level required for an atomic bomb. 

Goldman lifts oil forecasts 

“After rallying sharply to just over $90/bbl on rising geopolitical risks, Brent prices have declined to $87/bbl,” said analysts at Goldman Sachs, in a note.

“We still see a $90/bbl ceiling on Brent in our base case of non geopolitical supply hits,” the influential investment bank said. “The reasons are that high spare capacity and higher prices will likely lead OPEC+ to raise production in Q3, inventories remain flat over the past year, and prices are already triggering stabilizing responses, including rises in OPEC exports and lower crude demand from the US SPR and refineries.”

That said, the bank lifts its floor for Brent to $75 a barrel, from $70, saying it assumes only a gradual normalization in the risk premium, and think that OPEC will manage to keep spot prices above long-dated prices through a smaller unwind of production cuts than we assumed before.

Additionally, “we still see value in long oil positions given significant portfolio hedging benefits against geopolitical shocks, and an attractive 10% annualized roll yield.”

It also lifts its Brent forecast to $86 a barrel for the second half of 2024, versus $85 prior, and to $82 a barrel for 2025, from $80.

Oil still set for weekly losses 

Oil prices are set for hefty weekly falls, on the back of a stronger , following strong U.S. economic data and warnings from a slew of Fed officials that interest rates will remain higher for longer.

A stronger dollar pressures crude demand by adding a currency-related premium for international buyers. 

The prospect of higher-for-longer rates factors into fears that global economic growth will be stymied by tight policy, which also bodes poorly for oil demand. 

Traders were seen largely pricing out expectations for a June rate cut by the Fed. 

(Ambar Warrick contributed to this article.)

By Noah Browning and Deep Kaushik Vakil

(Reuters) – Oil slipped on Friday following an earlier price spike of more than $3 after Iran played down reported Israeli attacks on its soil, in a sign that an escalation of hostilities in the Middle East might be avoided.

futures were down 48 cents, or 0.6%, at $86.63 a barrel by 1155 GMT. The most active U.S. West Texas Intermediate contract was down 38 cents, or 0.5%, to $82.35.

Explosions were heard in the Iranian city of Isfahan on Friday in what sources described as an Israeli attack, but Tehran played down the incident and indicated it had no plans for retaliation in a response that could ease concerns about escalation into a region-wide war.

Iran struck Israel with a barrage of drones and ballistic missiles on Saturday in retaliation for a presumed Israeli air strike on April 1 that destroyed a building in Iran’s embassy compound in Damascus and killed several top Iranian officers.

“Whilst the initial spike in oil may have highlighted the initial fear of further escalation, we have seen both equities and crude reverse some of those preliminary moves,” said Joshua Mahony, chief market analyst at Scope Markets.

“Events of the past week appear to be more about showing their willingness to act rather than actually seeking to incite a war …For markets this is a best case scenario”.

Investors had been closely monitoring Israel’s reaction to the April 13 Iranian drone attacks and have been gradually unwinding oil’s risk premium this week.

Prices have fallen more than 4% since Monday and are set for their biggest weekly loss since early February.

“The oil market is nonetheless concerned as there is too much oil supply at stake,” said Bjarne Schieldrop, commodities analyst at SEB Research.

Meanwhile, U.S. lawmakers have tucked sanctions on Iran’s oil exports into a pending Ukraine aid package which targets ships, ports or refineries that process Iranian crude and transactions from Chinese financial institutions involving purchases of petroleum from Iran.

Iran is the third largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC), according to Reuters data.

The U.S. also announced sanctions this week on Iran targeting its unmanned aerial vehicle production.

By Timothy Gardner

WASHINGTON (Reuters) – U.S. lawmakers have tucked sanctions on Iran’s oil exports in the House of Representatives’ aid package for Ukraine, Israel and the Indo-Pacific after Tehran’s missile and drone strike on Israel last weekend.

If passed through both the House and Senate and signed by President Joe Biden and then implemented and enforced, the measures could eventually impact Iran’s oil exports. Exactly when is unclear since the measures are still being debated and give the U.S. president waiver powers.

The House could vote on the package as soon Saturday, Republican Speaker Mike Johnson said.

Despite a wide range of existing U.S. sanctions on Iran’s oil exports over its nuclear program, the shipments have increased amid demand for the oil from China and as networks outside of the U.S. financial system deal in the oil.

UKRAINE AID PACKAGE

The package, which includes billions of dollars of aid for Ukraine, Israel and the Indo-Pacific, contains several measures on Iran sanctions. Two “could explicitly impact Iranian petroleum exports if implemented and enforced”, according to ClearView Energy Partners, a non-partisan research group.

The first, the Stop Harboring Iranian Petroleum Act, or SHIP, would impose sanctions on ports, vessels and refineries that “knowingly engage” in shipping, transfers, transactions and processing of Iranian and products, ClearView said. Ships that violate the ban would be barred from U.S. ports for two years.

However, the bill includes 180-day waivers that Biden could invoke that would avert oil price spikes.

The package also contains an Iran-China measure that would expand secondary sanctions on Iranian oil so that they apply to any transaction by a Chinese financial institution involving purchases of petroleum from Iran. The sanctions would be triggered by annual assessments and run through 2029.

Again, however, the U.S. president could likely apply renewable waivers of the sanctions.

OTHER MEASURES IN AID PACKAGE

Another measure would impose sanctions on the office of Iran’s supreme leader Ayatollah Ali Khamenei, related officials and foundations and conglomerates overseen by the office. The measure could, “depending on how broadly it is interpreted”, include Iran’s charitable trusts and petroleum businesses, according to ClearView.

Another measure in the package requires reports on the holdings and non-Iranian financial accounts of 20 Iranian leaders and the leaders of groups supported by Iran, including Hamas and Hezbollah, and mandates closure of any U.S. accounts. That could provoke retaliation by sanctioned parties that could affect the petroleum business, according to ClearView.

WHAT IF THE AID BILL FAILS?

If the package fails due to fierce objections from right wing Republicans or other reasons, some of the measures in it could still pass both chambers of Congress as part of other legislative packages later in the year, ClearView said. Those include the SHIP measure and the Iran-China measure, it said.