Oil Price Jumps On Fear Of Iranian Retaliation Against U.S.

Jan 3, 2020

The price of oil surged Friday on concerns that Iran might respond to the killing of its top general by the United States by disrupting global supplies of energy from the Middle East.

News that Gen. Qassem Soleimani, head of Iran’s elite Quds Force, was killed in an air attack at the Baghdad international airport prompted expectations of Iranian retaliation against U.S. and Israeli targets.

Amid past flare-ups with the U.S., Iran threatened the supply of oil that travels from the Persian Gulf to the rest of the world. About 20% of oil traded worldwide goes through the Strait of Hormuz, where the shipping lane is only 3 kilometers (2 miles) wide and tankers have come under attack this year.

The international benchmark for crude oil jumped 4.5%, or $2.98, to $69.23 a barrel in London trading. The U.S. contract was up 4.3%, or $2.60, to $63.78.

“Revenge will come, maybe not overnight, but it will come and until then we need to increase the geopolitical risk premium,” said Olivier Jakob, head of consultancy Petromatrix, in a note to investors.

He noted that Iran's response may not be limited to the Strait of Hormuz.

In September, Yemen's Iran-backed Houthi rebels launched drone attacks on the world's largest oil processing facility in Saudi Arabia. The strike briefly took out about half of the supplies from the world's largest oil exporter. The U.S. directly blamed Iran, which denied involvement.

Launching attacks that can't be easily linked back to Iran limits the chances of direct retaliation.

However, Iran has also directly targeted tankers. This year it seized a British-flagged tanker, the Stena Impero, for several weeks. And it has shot down a U.S. military drone.

About 80% of the crude oil that travels through the Strait of Hormuz goes to countries in Asia, including China, Japan, India and South Korea.

But the rise in the global price of oil will have a wider effect, particularly in oil-importing countries with big manufacturing sectors like Germany and Italy. Those countries fared worst in the stock market on Friday, with their main indexes falling 1.4% and 1.1% respectively.

The economic damage could be limited given that the energy market is flush with oil while the growth in demand has softened as major economies have slowed. And crude-producing countries - particularly the Unites States - have been pumping oil at a high rate.

The OPEC cartel and key ally Russia agreed last month to cut their oil production, but many countries have been pumping above their limits.

That has so far kept the price of oil in check. On Friday, the Brent benchmark rose to its highest since May after largely hovering around $60 a barrel.

A gradual rise in renewable energy production could also limit the economic damage from a jump in crude prices. But experts note that fossil fuels like oil continue to provide the vast majority of energy that drives industry, transportation and heating, among other things.