Oil Prices Jump on Killing of Iran's Military Leader; Retaliation And Even Peace Predicted

Meanwhile, Kilduff stresses there is still "a ton of spare capacity": File Image/PixaBay

The U.S. airstrike that killed major-general Qassem Soleimani, architect of Iran's spreading military influence in the Middle East, caused a panic among crude traders on Friday, with prices of the commodity jumping to levels not seen in over three months.

Fear that the escalating hostilities between the U.S. and Iran could lead to a global disruption in oil supplies resulted in Brent on Friday skyrocketing 3.6 percent, or $2.35, to $68.60 per barrel; West Texas Intermediate settled up $1.87 (3.1 percent) at $63.05 per barrel.

As with most fear-driven oil trading, the actual effect of the increased geopolitical risk regarding Iran remains unclear, especially considering the Islamic republic has already seen its exports cut to minimal volumes due to U.S. sanctions.

Andy Lipow, president of Lipow Oil Associates, remarked, "The market is trying to assess whether we'll see a supply disruption, if any."

Indeed, John Kilduff, founding partner at Again Capital, pointed out that "There's still a big cushion and a ton of spare capacity in Saudi Arabia; we're not in the dire tightly supplied market we were in a few years ago."

Still, commentators preferred to focus not on the potential benefits of Soleimani's death for the Middle East but strictly on what the Irani8ans will do next: "This is not a run-of-the-mill general being assassinated," worried Helima Croft, head of global commodities strategy for RBC Capital Markets. "I don't think this is a one off....it may be quiet for a period, then there could be another incident."

Paul Sheldon, chief geopolitical risk analyst at S&P Global Platts, offered a few possible retaliatory measures Iran could take in the days and weeks to come: "The Iranian retaliation could take the form of a quick response by proxies against U.S. allies and assets; one-off incidents targeting Gulf oil flows are possible, as are attacks on Gulf oil infrastructure, after the Abqaiq incident did not trigger a U.S. military response."

Meanwhile, the spread between the December 2020 and 2021 U.S. crude futures contracts as well as the corresponding spread for Brent surged to the highest level since October 2018, meaning the oil futures market is already beginning to price in near-term supply tightness - despite the prevailing fear in analytical circles prior to the airstrike was the world was swimming in too much oil and demand was waning.

As for the prospect of all-out war, Henry Rome, Iran analyst with Eurasia Group, said the prospect was unlikely and that instead skirmishes will likely occur in Iraq to minimize the possibility of the Gulf unifying against Tehran.

As far as Ed Morse, head of commodities research at Citigroup, is concerned, the current conflict could even result in the U.S. and Iran working out a new deal on the latter's nuclear program - which he warned may lead to a bearish rather than bullish 2020 market.