(Reuters) – Oil slipped on Friday after prices spiked earlier on reports that Israel had attacked Iran as market fears of a major escalation to hostilities in the Mideast appeared to ease.
After the benchmark contracts jumped more than $3 in the session, Brent futures were down 46 cents, or 0.5%, at $86.65 a barrel by 1015 GMT. The most active US West Texas Intermediate contract was down 34 cents, or 0.4%, to $82.39.
Israel launched an attack on Iranian soil on Friday, sources told Reuters. 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.
Tehran played down the incident and indicated it had no plans for retaliation - a response that appeared gauged towards averting region-wide war.
"Whilst the initial spike in oil may have highlighted the initial fear of further escalation, we have seen both equities and crude reverse some of those preliminary moves," said Joshua Mahony, chief market analyst at Scope Markets.
"Events of the past week appear to be more about showing their willingness to act rather than actually seeking to incite a war ...For markets this is a best case scenario".
Last weekend Iran launched hundreds of drones and missiles in a retaliatory strike after a suspected Israeli attack 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.
The US also announced sanctions on Iran, an OPEC member, targeting its unmanned aerial vehicle production after the country's attack on Israel. The sanctions on Iran, however, exclude its oil industry.