Crude oil prices bumped up by about 3 percent Friday after a top Iranian military commander was killed in an airstrike ordered by President Donald Trump. But analysts agreed that what happens next will be far more significant for world petroleum markets.
“No real oil volumes have been lost, and the overall market is well supplied. In fact, Saudi Arabia has significant spare capacity at the moment,” John Kilduff, an analyst with Again Capital, a New York investment firm, wrote in an email.
“Still, this is a big deal, and the market is on tenterhooks, awaiting Iran’s response.”
The killing of Qasem Soleimani, commander of Iran’s Quds Force, whose car was struck by a missile as he was leaving the airport in Baghdad late Thursday night, was described as a “cowardly and vicious act” by Iranian President Hassan Rouhani.
“Iran will take revenge for this heinous crime,” he said.
Iran’s defense minister, Amir Hatami, said the strike by the “arrogant U.S.” would be met with a “crushing” response.
An obvious point of vulnerability is the narrow Strait of Hormuz, hemmed in by Iran’s southern coast.
About a sixth of the world’s oil supply passes through the waterway, which is 21 nautical miles wide at its narrowest point, and has been deemed “the world’s most important choke point” by the U.S. Energy Information Administration. The quantity of oil ferried through the strait — much of which is headed for China, India and Japan — is nearly double that of all U.S. oil production.
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Should threats of attack close the passage, there could be devastating consequences for the world economy.
Other potential Iranian targets are oil fields and facilities in Iraq or Saudi Arabia.
Two oil tankers in the Persian Gulf were crippled by attacks in June, and drone strikes on state-owned Saudi Aramco in September temporarily took 5.7 million barrels of crude, or 6 percent of worldwide consumption, out of daily circulation, causing the biggest daily jump in oil prices since 1988.
Production was restored within two weeks, and price increases following both incidents — as much as 15 percent following the drone attack — fairly quickly subsided.
In a note issued late Thursday night, ClearView Energy Partners, a research firm based in Washington, D.C., said it is reasonable to expect Iranian reprisals “possibly via all three avenues Iran has pursued in the recent past: (1) targeting regional shipping and energy production; (2) proxy (and principal) attacks against U.S. assets and allies, including cyberattacks; and (3) further nuclear brinkmanship.”
Any one of those, it said, would send oil prices higher. The note also argued that market prices continue to suggest undue faith in “Iranian rationality and U.S. restraint.”
Robert McNally, president of Rapidan Energy Group in Bethesda, Maryland, wrote in an email: “Direct attacks against U.S. personnel, diplomats or vessels or a return to targeting (Persian) Gulf oil infrastructure or tankers could easily add another $5-10 dollars per barrel to the price.
“Should conflict escalate to an all-out conventional conflict including the U.S. and Iranian militaries in the Gulf, crude prices could spike into the triple digit range.”
On Friday morning Brent crude rose nearly 4 percent, before dropping back an increase of about 3.5 percent later in the day. West Texas Intermediate was up just shy of 3 percent. Oil company stocks also climbed.
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In Russia, the world’s second-largest producer of oil after the United States, the stock index hit an all-time high on the news from Baghdad.
But in New York, Wall Street’s euphoric start to 2020 took a sobering hit, with the Dow Jones industrial average falling more than 340 points at the opening bell.
The blue-chip index clawed back some of those losses and closed the day down 234 points, or 0.8 percent, to finish at 28,634.
The Standard & Poor’s 500 index ended the day at 3,234, down 0.7 percent. The tech-heavy Nasdaq composite lost 71 points, 0.8 percent, to settle at 9,020.
All three indexes had set record highs Thursday, the first day of trading of the year.