Oil prices edged higher on June 18 in a volatile session as investors weighed the chance of supply disruptions from the Iran-Israel conflict and potential direct U.S. involvement.

Brent crude futures edged up 3 cents to $76.48/bbl by 1:24 p.m. EDT. U.S. West Texas Intermediate crude rose 16 cents at $75/bbl. Earlier in the session, prices were down around 2% a day after jumping over 4%.

Iranian Supreme Leader Ayatollah Ali Khamenei rejected U.S. President Donald Trump's demand for unconditional surrender, and Trump said his patience had run out but did not indicate what his next step would be.

Speaking to reporters outside the White House, Trump declined to say whether he had made any decision on whether to join Israel's bombing campaign against arch-enemy Iran.

"I may do it. I may not do it. I mean, nobody knows what I'm going to do," he said.

Trump said Iranian officials had reached out about negotiations including a possible meeting at the White House but "it's very late to be talking," he said.

A source familiar with internal discussions said one of the options Trump and his team were considering included joining Israel in strikes against Iranian nuclear sites.

Higher risk

Direct U.S. involvement would widen the conflict, putting energy infrastructure in the region at higher risk of attack, analysts say.

"The biggest fear for the oil market is the shutdown of the Strait of Hormuz," ING analysts said in a note.

"Almost a third of global seaborne oil trade moves through this chokepoint. A significant disruption to these flows would be enough to push prices to $120 [per bbl]."

Iran is OPEC's third-largest producer, extracting about 3.3 MMbbl/d of crude oil.

Iran's ambassador to the United Nations in Geneva said Tehran has conveyed to Washington that it will respond firmly to the U.S. if it becomes directly involved in Israel's military campaign.

Also, markets are awaiting news from a second day of U.S. Federal Reserve discussions on June 18. The central bank is expected to leave its benchmark overnight interest rate in the range of 4.25% to 4.50%.

However, the Middle East conflict and risk of slowing global growth could push the Fed to cut rates by 25 basis points in July, sooner than current expectations of September, said Tony Sycamore, market analyst at trading platform IG.

Lower interest rates generally boost economic growth and demand for oil.

Complicating the decision for the Fed, however, is the Middle East conflict's potential creation of a new source of inflation via surging oil prices.

In U.S. supply, crude stocks fell by 11.5 MMbbl to 420.9 MMbbl last week, the Energy Information Administration said on June 18. Analysts had expected a 1.8-MMbbl draw.

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