After US President Trump directed the killing of top Iranian general Qasem Soleimani in a drone attack at Baghdad airport during last week oil prices have spiked higher. The reason for the spike in oil prices has been the concern that Middle East shipping, pumping and production facilities could become targets. Overnight US crude reached a high of 65.65 on the news that Iran has launched over a dozen ballistic missiles at two Iraqi bases containing US and coalition troops. No US casualties are reported yet, but some Iraqi casualties have been reported. Iran is threatening more ‘crushing attacks’ if the US retaliates. US President Trump tweeted, “all is well…” and did not announce immediate retaliation. What now for oil prices?
The lesson from Saudi Arabia’s drone attack from September 2019
The price of oil surged on the drone attack on Saudi’s oil production facility as the country’s production levels were cut in half. The same happened on attacks to crude carriers in the Persian Gulf in May and June.
However, in all these instances gains were short-lived. Why? Because on a fundamental level, the crude market is well supplied. This is a point recently made by JP Morgan on the current oil spikes and UBS will want to see some definite supply disruption in order to add to gains from here.
So the general market consensus is that oil is unlikely to make higher further gains here without some kind of further catalyst. If the present situation remains as it is I am not expecting buyers to take the price above recent highs on either US crude or Brent crude. However, if a US spike does actually come then I would expect immediate oil bids on the news and any longer-term rise in oil prices would need to be sustained by supply issues. So, for example, if the US hit Iranian oil facilities or the US-Iran situation escalates further, that could lead to threats to supply from Iraq, Kuwait, the UAE, as well as Saudi Arabia. This is a total of 68% of OPEC’s total production.