Oil prices surge 3% on reports of Israeli strikes on Iran

Iran's Fars news agency said explosions were heard at an airport in the Iranian city of Isafahan but the cause was not immediately known. Several flights were diverted over Iranian airspace, CNN reported.

Oil prices jumped on Friday as reports that Israel had attacked Iran roiled markets and sparked concerns that Middle East oil supply could be disrupted.

The benchmark contracts surged more than $3 before easing slightly. At 0615 GMT, Brent futures were up $1.40, or 1.61 per cent, at $88.51 a barrel. The most active US West Texas Intermediate contract climbed $1.38, or 1.68 per cent, to $83.48 per barrel.

Israel launched an attack on Iranian soil on Friday, sources told Reuters, the latest tit-for-tat exchange between the two countries that threatens to drag the region deeper into conflict.

Iranian media reported explosions, but an Iranian official told Reuters those were caused by air defence systems. State media said three drones over the central city of Isfahan had been shot down.

"Rising geopolitical risk premiums translate to a risk-off environment at this juncture with a heightened risk of oil supply disruption at least in the short-term," said Kelvin Wong, an analyst at OANDA in Singapore.

"Further escalation that the tit-for-tat retaliation between both sides will drag for longer," said Jun Rong Yeap, a market strategist at IG in Singapore.

An Iranian counterattack poses "significant risks to the widening of the conflict to a regional one and could potentially put some oil supplies at risk. Prices of oil could stay supported in the meantime as tensions will continue to heat up," Yeap said.

Last weekend Iran launched hundreds of drones and missiles in a retaliatory strike after a suspected Israeli strike on its embassy compound in Syria. Most of the drones and missiles were downed before reaching Israeli territory, with minimal damage and casualties.

Investors have been closely monitoring Israel's reaction to the April 13 Iranian drone attacks. The geopolitical risk premium in oil prices had been unwinding this week on the perception that any Israeli retaliation to Iran's attack would be moderated by international pressure.

In global crude oil supply, Venezuela lost a key US licence allowing the OPEC member to export oil to markets globally. The US also announced sanctions on Iran, another OPEC member, targeting its unmanned aerial vehicle after the country's drone strike on Israel. The sanctions on Iran, however, exclude its oil industry.