Oil slips as Israel-Iran strikes spare key energy infrastructure

Oil prices edged down on Monday, paring back Friday's 7% surge, as renewed military strikes by Israel and Iran over the weekend left oil production and export facilities unaffected.

Brent futures were down 93 cents, or around 1.3%, to $73.30 a barrel by 1307 GMT, while U.S. WTI futures were off 99 cents or nearly 1.4%, to $71.99.

Both benchmarks jumped more than $4 a barrel in Asian trading before giving back gains. They settled 7% higher on Friday, having surged more than 13% during the session to their highest levels since January.

"It all boils down to how the conflict escalates around energy flows," said Harry Tchilinguirian, group head of research at Onyx Capital Group. "So far, production capacity and export capacity have been spared and there hasn't been any effort on the part of Iran to impair flows through the Strait of Hormuz."

Iranian missiles struck Israel's Tel Aviv and the port city of Haifa on Monday, destroying homes and fuelling concerns among world leaders at this week's G7 meeting that the conflict could widen.

An exchange of strikes between Israel and Iran on Sunday resulted in civilian casualties, with both militaries urging civilians on the opposing side to take precautions against further attacks.

Some gas infrastructure has been hit. Iran partially suspended gas production at its South Pars field after an attack by Israel on Saturday. The gas it produces is consumed domestically. Last week, Israel shut down its offshore Leviathan gas field preemptively.

STRAIT OF HORMUZ IN FOCUS

A key question is whether the conflict will lead to disruption in the Strait of Hormuz.

About a fifth of the world's total oil consumption, or some 18 to 19 million barrels per day of oil, condensate and fuel, passes through the strait.

While markets are watching for potential disruption to Iranian oil production due to Israel's strikes on energy facilities, heightened fears over a Strait of Hormuz blockade could sharply lift prices, said Toshitaka Tazawa, an analyst at Fujitomi Securities.

Iran, a member of the Organization of the Petroleum Exporting Countries, currently produces around 3.3 million bpd and exports more than 2 million bpd of oil and fuel.

The spare capacity of OPEC+ oil producers to pump more to offset any disruption is roughly equivalent to Iran's output, according to analysts and OPEC watchers.

"If Iranian crude exports are disrupted, Chinese refiners, the sole buyers of Iranian barrels, would need to seek alternative grades from other Middle Eastern countries and Russian crudes," Richard Joswick, head of near-term oil analysis at S&P Global Commodity Insights, said in a note.

"This could also boost freight rates and tanker insurance premiums, narrow the Brent-Dubai spread, and hurt refinery margins, particularly in Asia," Joswick added.

China's crude oil throughput declined by 1.8% in May from a year earlier to the lowest level since August, official data showed on Monday, as maintenance at both state-owned and independent refineries curbed operations.

U.S. President Donald Trump said on Sunday he hoped Israel and Iran could broker a ceasefire, but added that sometimes countries had to fight it out first. Trump said the U.S. would continue to support Israel but declined to say if he had asked the U.S. ally to pause its strikes on Iran.

German Chancellor Friedrich Merz said he hoped a meeting of the Group of Seven leaders convening in Canada would reach an agreement to help resolve the conflict and keep it from escalating.

Meanwhile, Iran has told mediators Qatar and Oman that it is not open to negotiating a ceasefire while under Israeli attack, an official briefed on the communications told Reuters on Sunday.

(Reporting by Anna Hirtenstein in London. Additional reporting by Mohi Narayan in New Delhi and Yuka Obayashi in Tokyo; Editing by Kate Mayberry, Jason Neely, Aidan Lewis and Alison Williams)