Oil in biggest gain since 2022 as Israel hits Iran, but Citi warns gains may fade

Investing.com – Oil prices notched the biggest one-day gain since March 2022 on Friday as the intensifying Israel-Iran conflict threatens to disrupt crude supplies in the oil-rich Middle East region, but the surge was largely driven by short-covering, suggesting there’s limited room for further upside unless the conflict spills over into a regional war or Tel Aviv targets Iran’s energy infrastructure, according to Citi analysts.

“If the overnight operation against Iran effectively were to reduce managed money gross shorts from 187k lots to 0, then the price move could have been ~$14/bbl,” Citi analysts said in a recent note, adding, “we do not expect a further short-covering rally in meaningful size.”

Brent crude spiked to an intraday high of $78.5/bbl before settling at  following Israel’s military strikes, but Citi sees energy flow disruptions as likely limited, and doubts prices will stay elevated for long. “Heightened geopolitical tensions may well remain, but we don’t expect energy prices to stay elevated for a sustained period of time,” the analysts said.

On the ground, Israel’s military said its attack on an Iranian nuclear facility near Isfahan dismantled infrastructure used to reconvert enriched uranium—a key step in the nuclear weapons production process. The Israel Defense Forces said Israeli fighter jets “completed a strike on the Iranian regime’s nuclear site” near Isfahan, about 350 kilometers southeast of Tehran, destroying facilities for producing metallic uranium, reconversion infrastructure, and laboratories.

The escalation followed Iran’s barrage of missiles and rockets after Israel’s earlier strikes on targets inside the Islamic Republic. Israeli Defense Minister Israel Katz said Iran had crossed “red lines” by targeting civilian areas in its missile strikes, vowing that Israel would “continue to defend the citizens of Israel and ensure that the Ayatollah regime pays a very heavy price for its heinous actions.”

The escalating tensions aren’t expecting to keep oil prices on a continued surge, Citi says, attributing managed money positioning as key driver of the rally as short sellers were  squeezed. "Fresh longs would then need to lift prices further,” Citi added, signaling that additional upside would require a material escalation—such as direct attacks on energy infrastructure or a broader regional conflict.  

"The market is closely monitoring further Iranian and Israeli responses and whether military actions might involve energy infrastructure in the future,” Citi said