Oil and gold prices spiked initially but then retreated on Friday as Iranian authorities downplayed reports of an attack from Israel on a military site in the country’s central region. The volatile moves reflected investor concerns that escalating Middle East tensions could disrupt global energy supplies.
Early Friday, oil benchmark Brent crude jumped over $90 a barrel after unconfirmed reports emerged of Israeli drone strikes hitting an Iranian munitions facility in Isfahan province. Gold prices also surged close to record levels above $2,400 an ounce as the precious metal was sought as a haven during the geopolitical turmoil.
However, the spikes proved short-lived as Iran’s state media claimed there was “no damage” from the alleged attack. Brent crude pared gains to trade around $87 a barrel, while gold retreated below $2,400 an ounce by afternoon in New York.
The whiplash in commodity prices showed how jittery markets have become over prospects of a wider conflict between Israel and Iran disrupting energy flows from the Middle East. Any protracted supply outages could worsen global inflation that has remained stubbornly high.
“The concern for markets would mainly be the inflationary one, that this would actually add to inflation,” said Randeep Somel, a fund manager at M&G Investment Management. While praising the lack of further escalation so far, he noted UK inflation is still elevated above 3%, causing policy headaches.
Iran is a major oil producer, ranked seventh globally by the U.S. Energy Information Administration. As the third-largest member of OPEC, it ships most crude exports through the Strait of Hormuz, a critical chokepoint that handles around 20% of world oil supply.
Any disruptions to that vital maritime corridor between Iran and Oman could quickly tighten global energy markets. Memories linger of oil spiking above $125 a barrel last year after Russia’s invasion of Ukraine triggered sanctions constraining Russian exports.
“What the latest events underscore is the heightened fragility and volatility in the Mid East situation,” said energy analyst Vandana Hari of Vanda Insights. “Even rumors of a flare-up trigger knee-jerk reactions in oil prices.”
While Israel and Iran have traded accusations over the alleged drone strike, both nations have reasons to avoid unchecked escalation that could spiral into outright war. Iran likely wants to prevent jeopardizing a potential revival of the 2015 nuclear deal, which could ease sanctions allowing it to ramp up oil sales.
For Israel’s part, recent polls show the public has little appetite for a drawn-out military engagement against Iran unless provoked by direct attacks on Israeli territory. The government has stopped short of confirming involvement in the Isfahan incident so far.
Still, the smoldering rivalry between the bitter enemies keeps tremors rippling through global energy markets. On Wall Street, stocks seesawed as traders weighed geopolitical risks. The Dow Jones industrials rose while the S&P 500 fell. In foreign markets, UK and Asian equities saw muted moves.
Any progress resolving tensions could calm commodity prices. But another flare-up risks fanning fresh rallies that exacerbate inflation pressures central banks have struggled to contain worldwide over the past year.
With Iran and Israel eyeing each other warily, the Middle East powder keg is unlikely to stop roiling markets anytime soon. The biggest fear is that one spark could ignite an energy shock that pours gasoline on the fire of global price pressures.
