Oil surged toward a 3½-month high as attention turned to Iran's threatened retaliation for the U.S. airstrike that killed the Islamic Republic's top general.
Brent futures rose 3.5% on Friday to the highest level since the attacks on Saudi Arabia's oil facilities in September. The airstrike near Baghdad airport killed Qassem Soleimani, the Iranian general who led the Revolutionary Guards' Quds force. The U.S. intends to send "thousands of additional" troops to the Middle East amid rising regional tensions, CNN reported, citing an unidentified U.S. defense official.
Iran's foreign minister, Mohammad Javad Zarif, in an interview with state TV said the Islamic Republic's response to the U.S. killing the country's top military commander will come "at any time and by any means."
Brent crude for March settlement rose $2.35, or 3.5%, to close at $68.60 per barrel, after rising as much 4.9% earlier. The global benchmark's bullish options bias was the biggest since early November while the December 2020 contract was at the widest premium to December 2021 since October 2018.
West Texas Intermediate for February delivery added $1.87, or 3.1 %, to settle at $63.05 a barrel, after advancing as much as 4.8%.
If sustained, the rise in oil prices could push the cost of gasoline, heating fuel and electricity higher, potentially dragging on the global economy at a time when it is already slowing.
While no oil installations or production were affected, targeting one of Iran's most powerful generals ratchets up tension between Washington and Tehran, heightening fears of an armed confrontation that could pull in other countries. Iran's supreme leader, Ayatollah Ali Khamenei, vowed that "severe retaliation" awaits the killers of Soleimani.
It remains to be seen how Iran will respond to the loss of a top leader, but there is widespread concern that whatever action Tehran takes might affect crucial oil supplies and push prices higher.
Tensions have been building after an Iran-backed Iraqi militia stormed the American embassy in Baghdad to protest deadly U.S. airstrikes earlier this week.
The killing of Soleimani inevitably raises fears about further instability in a region critical to the world's oil supply. While sanctions imposed by the United States have cut Iranian oil exports to a trickle, other critical oil producers, including Saudi Arabia, Kuwait, Iraq and the United Arab Emirates, are clustered around the Persian Gulf.
"Iran's ability to impact the U.S. will probably be mostly within the Middle East theater," said Neil Beveridge, a senior analyst at Bernstein, a market research firm. "Iraq and Saudi Arabia are obvious targets."
Concerns in the region have persisted over the past year as Saudi Arabia's energy facilities as well as several foreign tankers in and around the Persian Gulf have been attacked.
The attack on Soleimani rattled other markets. The S&P 500 Index and the Stoxx Europe 600 Index slid, while gold neared a six-year high as investors sought safe haven assets.
The strike also escalates an already tense three-way situation between the U.S., Iran and Iraq. The two Middle East countries combined pumped more than 6.7 million barrels a day of oil last month, according to data compiled by Bloomberg, more than one-fifth of OPEC output.
"This is more than just bloodying Iran's nose," Stephen Innes, chief market strategist at AxiTrader Ltd., said in a note. "This is an aggressive show of force and an outright provocation that could trigger another Middle East war."
Tankers carrying most of the oil leaving the Persian Gulf region-- about 18 million barrels a day -- as well as giant vessels loaded with liquefied natural gas, must pass through the Strait of Hormuz, a narrow channel that separates the United Arab Emirates, Oman and Iran and leads to the Indian Ocean.
The strait is 21 miles wide at its narrowest point, and the width of the shipping lane in either direction is just 2 miles, according to the U.S. Energy Information Administration.
Iran's coastline covers much of the east side of the Gulf, leaving Tehran well-placed to harass shipping with small boats, missiles, mines and other weapons. Last year, Iran seized a number of tankers in the area in an apparent effort to show that if Tehran were not permitted to export its oil, then supplies from other producers in the area were at risk.
About 80% of the crude oil that travels through the strait goes to countries in Asia, including China, Japan, India and South Korea.
Market participants worry that Iran could step up such attacks on shipping, although such a move would be likely to bring a quick response from U.S. military forces in the area.
Analysts say that Iraq, which has become the second-largest oil producer in OPEC after the Saudis, could be where conflict between the United States and Iran plays out.
"Iraq is potentially the geopolitical flash point for 2020," said Amrita Sen, chief oil analyst at Energy Aspects, a market research firm. If Iraq does become the scene of escalating conflict between Tehran and Washington, "you can imagine, then, that the fields could be at risk," she said, referring to the oil fields that supply around 5% of world oil supplies. That could lead to a much larger surge in prices.
U.S. oil companies operating in Iraq, including Exxon Mobil, could also become targets in this proxy war, said Helima Croft, an analyst at RBC Capital Markets, an investment bank.
Still, the price surge could just as easily subside. While prices initially soared after the attack on Saudi Arabia's Abqaiq processing facility in September, crude then retreated in another sign that the market is concerned more with a surplus than supply shortages.
OPEC is sitting on vast amounts of spare capacity after reducing supplies for most of the past three years. Consuming countries from the U.S. to China control millions of barrels stored in strategic petroleum reserves that can be deployed to offset any shortage.
In the biggest sign of the oil market's transformation after the shale boom, the U.S. reported its first months as a net exporter of petroleum, including crude and refined oil products, late last year for the first time in roughly 75 years. In October, the United States exported a net 389,000 barrels a day, compared with net imports of close to 9 million barrels a day a decade or so earlier.
Information for this article was contributed by Sheela Tobben, Grant Smith and Javier Blas of Bloomberg News; by Alexandra Stevenson and Stanley Reed of The New York Times; and by Carlo Piovano of The Associated Press.
A Section on 01/04/2020