Oil surges past US$70 after Trump threatens Iraq sanctions, Iran retaliation

In a photo taken on Oct 12, 2019, an employee looks on at Saudi Aramco oil facility in Abqaiq, Saudi Arabia.
In a photo taken on Oct 12, 2019, an employee looks on at Saudi Aramco oil facility in Abqaiq, Saudi Arabia.PHOTO: REUTERS

SINGAPORE (REUTERS, BLOOMBERG) - Oil prices shot more than 2 per cent higher on Monday (Jan 6), with Brent rising above US$70 a barrel, after US President Donald Trump issued a threat to impose sanctions on Iraq amid escalating tensions with Iran in the Middle East.

Brent crude futures soared to a high of US$70.27 a barrel at 0222 GMT, up US$1.67, or 2.4 per cent, from Friday’s settlement.

US West Texas Intermediate crude was at US$64.39 a barrel, up US$1.34, or 2.1 per cent, after touching US$64.44 earlier, the highest since April.

The gains extended Friday’s more-than-3 per cent surge after a US air strike in Iraq killed top Iranian commander Qassem Soleimani on Friday. The killing has heightened concerns of a widening Middle East conflict that could disrupt oil supplies from a region that accounts for nearly half of the world’s oil production.

On Sunday, President Trump threatened to impose sanctions on Iraq, the second largest producer among the Organization of the Petroleum Exporting Countries (Opec), if US troops were forced to withdraw from the country. Baghdad earlier called on American and other foreign troops to leave Iraq.

Trump also said that the United States will retaliate against Iran if Tehran were to strike back after the killing.

The incident “will trigger a long cycle of regional escalation with significant risks to US assets and Mideast energy infrastructure that nevertheless stop short of war,” Eurasia Group analyst Ayham Kamel said in a note.

“But the risk of limited conflict is real. It would include substantial Iranian attacks on Gulf energy targets and direct naval clashes between the US and Iran.”

The consultancy expects oil prices in 2020 to range from US$65 to US$75 a barrel, based on rising risks to oil infrastructure in the region.

Meanwhile Capital Economics analyst Caroline Bain said: “Friday’s incident has all but removed the possibility of a lifting of Iranian sanctions, a large downside risk to our oil price forecast.”

Rising tensions between the US and Iran have already caused unprecedented disruptions to oil markets, but so far they've been short-lived. Last year, Washington blamed Teheran for sabotage attacks on supertankers and a missile and drone attack on Saudi Arabia's Abqaiq crude-processing plant in September -- the largest single supply halt in the industry's history.

TOUGH TALK

Trump's tough talk on Saturday followed Iran's threat of a protracted response, and eclipsed his assertion a day earlier that the US hadn't launched the attack near Baghdad airport on Thursday to "start a war." The president is also sending more troops to the Middle East.

 
 

The Iranian leadership has signaled that it will probably target US military installations and bases in the Middle East and mobilize its network of militias across the region.

Iraq is the second-largest producer in the Organization of Petroleum Exporting Countries (Opec), pumping 4.65 million barrels a day last month. Its immediate neighbors in the region - Saudi Arabia, Kuwait and Iran - together produce about 15 million barrels a day. Most of their exports leave the Persian Gulf through the Strait of Hormuz, a narrow waterway that Iran has repeatedly threatened to shut down if there's a war.

Beyond crude's rise, there were other signals in the market that people were preparing for further disruption.

Volatility rose to its highest level in a month and the cost of derivatives that insure against price spikes increased. Four million barrels of options contracts that would profit from a jump in Brent crude to US$95 a barrel traded for both March and September. The cost of insuring tankers could rise again, after it surged in the wake of the Abqaiq attack in September.

LESS ROOM

Still, oil's 23 per cent rise last year could already have taken it to levels that may not leave much room for further increase, according to analysts.

 
 

"The oil market always assumes the worst, so a lot of the general risk is already priced in," said Jaafar Altaie, managing director of Abu Dhabi-based consultant Manaar Group. "Prices at US$70 a barrel already assume the worst-case scenario and we see them holding there, in a range from US$60-US$70, for the first quarter."

The greatest risk to supply would be an attack on Iraq's southern fields, he said. Iran would likely continue to target tankers and energy infrastructure in the region as it's accused of having done in recent months, Christof Ruehl, a researcher on energy and policy at both Columbia and Harvard universities, said on Bloomberg television on Sunday.

"They're walking a tight rope" and face retaliation if they react too forcefully, Ruehl said.