Oil prices jumped about 4% on Oct. 1 following reports Iran was preparing to launch a missile attack on Israel.

Brent futures were up $2.50, or 3.5%, to $74.20/ bbl by 11:50 a.m. EDT (1550 GMT), while U.S. WTI crude rose $2.54, or 3.7%, to $70.71.

Israel's elite units launched limited ground raids into Lebanon, as Hezbollah, an Iran-backed group in Lebanon, fired missiles at Tel Aviv, with the U.S. warning it had indications Iran may be preparing to enter the fray with a ballistic missile attack on Israel.

The tit-for-tat escalation following weeks of intense Israeli airstrikes on Lebanon raised concerns of a broader Middle East conflagration that would suck in both Iran and the U.S.

"Iran would be making a huge mistake to attack Israel now. Jerusalem will not hesitate to widen its military offensive to hit Iran directly. And Iran's oil assets are very likely on the target list," Clay Seigle, an independent political risk strategist, said in an email.

An Israeli attack on Iranian oil production or export facilities could cause a material disruption, potentially more than a 1 MMbbl/d, Seigle said.

Before news of a possible missile attack from Iran, the oil market was trading down near a two-week low as the outlook for increased supplies and tepid global demand growth outweighed fears over an escalating Middle East conflict and its impact on crude exports from the region.

A panel of ministers from the OPEC+ producer group meets on Oct. 2 to review the market, with no policy changes expected.

Starting in December, the OPEC+ group comprising the OPEC plus allies such as Russia is scheduled to raise output by 180,000 bbl/d each month.

The possibility that Libyan oil output will recover weighed on the market earlier in the day. Libya's eastern-based parliament agreed on Monday to approve the nomination of a new central bank governor, which could help to end a crisis that has reduced the country's oil output.

Iran and Libya are both members of OPEC. Iran, which is operating under U.S. sanctions, produced about 4 MMbbl/d of fuel in 2023, while Libya produced about 1.3 MMbbl/d last year, according to data from the U.S. Energy Information Administration (EIA).

UBS analyst Giovanni Staunovo said the looming resumption of Libyan output was bearish for oil prices, while Chinese stimulus, U.S. oil demand growth and slowing U.S. crude supply growth were bullish.

In China, manufacturing activity shrank in September, a private sector survey showed on Sept. 30.

Analysts say stimulus measures over the last week are likely to bring China's 2024 growth back to about 5% after several months of below-forecast data cast doubts over that target, though the longer-term outlook remains little changed.

US oil inventories

Weekly U.S. oil storage data is due from the American Petroleum Institute trade group later on Oct. 1 and the EIA on Oct. 2.

Analysts projected U.S. energy firms pulled about 2.1 MMbbl of crude out of storage during the week ended Sept. 27. 

If correct, that would be the third withdrawal in a row and compare with a withdrawal of 2.2 MMbbl during the same week last year and an average increase of 0.4 MMbbl over the preceding five years (2019-2023).

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