Oil prices spike as Iran launches missile attack against Israel

Pedro Goncalves

Oil prices surged on Tuesday after Iran fired a series of ballistic missiles at Israel after it began a ground invasion of southern Lebanon, pushing prices to the highest level in nearly one year.

West Texas Intermediate (CL=F) rose more than 5% to trade just below $72 per barrel. Brent (BZ=F), the international benchmark price, also climbed above 5% to above $75 per barrel.

Earlier in the day US officials warned that Iran is preparing to launch missiles against Israel following its invasion of southern Lebanon.

The American official said such a move by Iran would carry “severe consequences”. The IDF launched “limited, targeted” raids overnight, ratcheting up geopolitical tensions in the Middle East.

As tensions rise, market analysts are closely watching the risk of disruptions to oil production and exports, particularly if the conflict spreads or targets vital infrastructure in key oil-producing nations.

Any military escalation, particularly involving Iran, could severely impact oil exports, leading to sharp price increases. This has heightened anxiety among investors who fear that even a limited conflict could destabilise energy supplies at a time of already fragile global economic recovery.

"Oil prices have surged on the back of the news that Iran is preparing a direct attack on Iran. However, smart money knows that the current reaction and swollen price action is nothing more than a mosquito bite, and this is because we have seen several episodes of this fireworks," Naeem Aslam, chief investment officer at Zaye Capital markets, said.

"If a real threat were to occur, we would not see these mosquito bites, which have caused the prices to rise, but in fact, we would see the price flirting near the 100-dollar price mark." he added.

Sterling has struggled to find support against the US dollar, with the GBP/USD pair trading around 1.3345 at the time of writing. As the market gears up for the release of key US economic data, the greenback remained bolstered by less dovish comments from Federal Reserve chair Jerome Powell, applying pressure on the currency pair.

Investors will be watching the upcoming US ISM Manufacturing Purchasing Managers Index (PMI) for September, scheduled for release later today, alongside speeches from Fed officials Raphael Bostic and Lisa Cook.

Powell's remarks on Monday signalled the US central bank’s commitment to maintaining economic stability. He said that while the Fed remains patient in its approach, interest rates would be gradually reduced over time.

Read more: FTSE 100 LIVE: European markets cautious as Israel starts ground invasion in Lebanon

Meanwhile, Atlanta Federal Reserve president Raphael Bostic added on Monday that he would consider a more aggressive 50 basis point rate cut at the November meeting if economic data showed a sharper-than-expected slowdown in job growth. However, Bostic also highlighted that his current forecast includes just one more 25 basis point cut this year.

Against the euro, the pound (GBPEUR=X) was also lower after hitting a 29-month high the previous session after cooling German inflation boosted bets on another European Central Bank (ECB) interest rate cut.

Spot gold prices fell for the second consecutive day on Tuesday, with the precious metal trading at $2,646 per ounce. Month-end flows favouring the US dollar weighed on gold, despite a decline in US Treasury yields. Still, bullion is poised to post monthly gains of over 5.4% for September, marking its best performance since March 2024, when prices surged by over 9%.

Meanwhile, US gold futures saw a slight increase to $2,665 per ounce at the time of writing

Powell’s speech pushed the US dollar, as measured by the Dollar Index (^NYICDX), up by 0.14% to 100.92, creating headwinds for non-yielding assets like gold.

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Goldman Sachs (GS) has raised its gold price forecast to $2,900 per ounce from $2,700 for early 2025, citing several key factors driving the upward revision. The investment bank highlighted gradually increasing flows into gold exchange-traded funds (ETFs), as interest rate cuts in the West and China provide further support. Additionally, sustained purchases by central banks are expected to bolster demand for the precious metal.

"We reiterate our long gold recommendation due to the gradual boost from lower global interest rates, structurally higher central bank demand and gold's hedging benefits against geopolitical, financial, and recessionary risks," the bank said in a note.

Meanwhile, the FTSE 100 (^FTSE) was lower. For more details check our live coverage here.

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