Oil prices surge after Israel's strike on Iran

Oil surged, stocks fell and investors sought safety in the U.S. dollar and government bonds Friday after Israel struck Iranian nuclear and military targets in an attack that raised the risk of war between the two countries and broader instability in the Middle East.

The S&P 500 was down 0.9 per cent in morning trading. The Dow Jones Industrial Average was down 601 points, or 1.4 per cent, as of 10:05 a.m. ET, and the Nasdaq composite was 0.9 per cent lower.

U.S. benchmark crude oil rose by $4.73 US, or 6.9 per cent, to $72.77 per barrel, its biggest gain since the early days of Russia's attack on Ukraine more than three years ago. Brent crude, the international standard, climbed $4.58 to $73.94 per barrel, also the largest single-day jump since the Russian invasion.

Oil prices are likely to rise in the short term but the key question is whether exports are affected, said Richard Joswick, head of near-term oil at S&P Global Commodity Insights.

"When Iran and Israel exchanged attacks previously, prices spiked initially but fell once it became clear that the situation was not escalating and there was no impact on oil supply," he wrote in an emailed analysis.

"Oil price risk premiums could rise sharply if Iran conducts broader retaliatory attacks, especially if on targets other than in Israel," Joswick said.

China is the only customer for Iranian oil but could seek alternative supplies from Middle Eastern exporters and Russia, he said. Iran's oil trade is restricted by Western sanctions and import bans, and Israel exports only small amounts of oil and oil products.

The yield on the 10-year Treasury fell to 4.35 per cent from 4.41 per cent late Wednesday and from roughly 4.80 per cent early this year. Treasury bonds and the dollar often rise when investors feel less inclined to take risks.

Goldman Sachs, in a note on Friday, said while it has incorporated a higher geopolitical risk premium into its adjusted summer 2025 oil price outlook, it continues to assume no disruptions to Middle East oil supply after Israel's attacks on Iran.

"The key question now is whether this oil rally will last longer than the weekend or a week — our signal is that there is a lower probability of a full-blown war, and the oil price rally will likely encounter resistance," said Janiv Shah, analyst at Rystad.

"Fundamentals show nearly all Iranian exports going to China, so Chinese discounted purchases would be most at risk here. OPEC+ spare capacity can provide the stabilizing force," he added.

In other markets, stocks dived and there was a rush to safe havens such as gold and the Swiss franc.

An increase in oil prices would also dampen the outlook for the German economy, the economic institute DIW Berlin said on Friday. It is the only G7 nation that has recorded no economic growth for two consecutive years.