Oil prices rose on Tuesday after reports suggested Israel has become more likely to attack Iran over its nuclear program. How real is the threat?

An unidentified U.S. State Department official told ABC News it was increasingly likely Israel would attack Iran, prompting retaliation against both Israel and the United States.

A short time later officials denied the report. "I have no information that would substantiate that, and I think it's rather foolish of people who often have no clue what they're talking about to assert things and not even have the courtesy to do so on the basis of their name," State Department spokesman Tom Casey said.

The defense official told ABC News one red line that could trigger an Israeli offensive would be when Iran's nuclear facility had produced enough enriched uranium to create an atomic weapon. That could happen in 2009 or later this year, ABC News reported, citing U.S. and Israeli intelligence assessments.

Pentagon spokesman Bryan Whitman said "I don't comment for Israel" when asked about the ABC News report.

For further insights into this volatile situation we turn to General Barry McCaffrey, a retired 4-star general and NBC News analyst.

It’s important to the Israelis to project the image that they’re taking action, says McCaffrey, but I can’t imagine they would have the bad judgment to actually take action.

The tough talk stems from a larger social movement. The young people of Iran think it’s a great idea to restore the lost glory of the Persian empire and they’re doing it with nuclear technology, McCaffrey explains. Going forward Iran's nuclear program will likely develop a lot of anxiety in the region with other Arab states following their lead. But a strike does not seem likely.

Traders how would you play it?

Until there’s demand destruction I think oil stays where it is, says Tim Seymour.

I’d play oil services, says Guy Adami. Look at Halliburton

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I wouldn’t play oil, counters Karen Finerman, but I wouldn’t be short either.

ConocoPhillips

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[COP  Loading...      ()   ] and Schlumberger

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[SLB  Loading...      ()   ] are both worth a look, adds Pete Najarian.


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> Inside the Oil Markets

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Trader disclosure: On July 1, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (C), (AGU), (BTU), (GS), (INTC), (MSFT), (NUE); Finerman Owns (GS); Finerman's Firm Owns SPX Index Puts; Finerman's Firm And Finerman Own (C) And (C) Leaps; Finerman's Firm Owns (MSFT), (SUN), (TSO), (VLO), (SBUX); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM); Pete Najarian Owns (AAPL), (NOK), (TSO), (XLF); Pete Najarian Owns (HBC) Puts, (MER) Puts, (RIMM) Calls, (SLB) Calls, (UBS) Calls, (WM) Calls, (YHOO) Calls; Seymour Owns (AAPL), (CFC), (F), (MER), (MSFT), (TSO), (TSL); Seygem Asset Management Owns (TTM), (PKX), (FMX); Seygem Asset Management Owns Shares Of Grupo Modelo

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