Oil prices surged to $89 a barrel on Monday following the conflict between Israel and Palestine that has escalated tensions across the Middle East and sparked concerns over potential disruptions to crude supplies from leading oil producers.

Brent crude, the international oil benchmark, saw an initial surge of 5.2 percent in early trading in Asia, before settling to a 2.7 percent increase at $86.87, still below last week's average levels and the annual high of $97.69 a barrel on Sept 28.

Nearly 1,400 casualties have been reported since the conflict between Israel and the militant group Hamas commenced at the weekend, including around 800 Israelis and 560 Gaza residents.

Israel's Prime Minister Benjamin Netanyahu declared war and promised "mighty vengeance", while Iran's President Ebrahim Raisi lauded Hamas for its "victory".

While Israel is not an oil producer, the conflict could bring regional uncertainty, and threatens to embroil both the United States and Iran.

Iran has emerged as a significant global supplier of additional crude oil in the last year, easing constricting markets. If the US were to expand sanctions on Teheran it could constrain shipments.

Pierre Andurand, an energy trading specialist and hedge fund manager, wrote in a social media post that while there was no imminent threat to supplies, the market could contract.

"Over the past six months, we have seen a very large increase in Iranian supply due to weak enforcement of sanctions," he said. "There is a good probability that the US administration will start enforcing those sanctions on Iranian oil exports more tightly."

Marcus Garvey, head of commodities strategy at Macquarie Group Ltd, told Bloomberg TV there may not necessarily be any severe interruption to supplies.

"At this stage, the price response that you've seen is quite understandable and proportionate, just in terms of putting a bit of risk premium in," he said. "People will draw parallels to the early 1970s'Yom Kippur War that's probably, with the following embargo, your extreme case. It's quite plausible you get no meaningful disruption."

The Financial Times reported the conflict might hinder US attempts to negotiate a deal with Saudi Arabia for normalizing relations with Israel, potentially impacting the kingdom's readiness to increase its oil production.

"The Israeli government is vowing an unprecedented response and it is hard to envision how Saudi normalization talks can run on a parallel track to a ferocious military counteroffensive," said Helima Croft, head of global commodity strategy at RBC Capital Markets.

The shekel, Israel's currency, plunged to its lowest value since early 2016, falling to 3.92 against the dollar after the conflict erupted.