Oil Prices Jump After U.S. Air Strike Kills Iranian Military Leader

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Oil Prices Jump After U.S. Air Strike Kills Iranian Military Leader

Oil prices jumped early Friday on news that a powerful Iranian military leader had been killed in a strike authorized by the United States, ratcheting up geopolitical tensions and threatening to disrupt world access to oil supplies.

The price of Brent oil, the international benchmark, surged in the early hours of Hong Kong trading to nearly $70 a barrel — an increase of 4 percent — after the Pentagon said President Trump had authorized the airstrike against Maj. Gen. Qassim Suleimani at Baghdad’s airport. West Texas Intermediate, the American oil benchmark, also rose about 4 percent, to nearly $64 a barrel.

Global stock markets were lower. Hong Kong’s Hang Seng lost 0.3 percent, and Germany’s DAX index was trading 1.7 percent lower. Futures pointed to a drop when Wall Street started trading.

Analysts warned that Iran would interpret the strike as an act of war. Iran’s supreme leader, Ayatollah Ali Khamenei, pledged “harsh retaliation,” according to Iran’s state news media. These developments raised the prospect of volatility in Iran and Iraq, two major oil producers.

Approaching midday in Europe, Brent crude oil reached about $69.20 a barrel.

The immediate price jump was among the largest since an attack on a critical Saudi oil installation in September temporarily knocked out 5 percent of the world’s oil supply. While Friday’s strike did not target any oil production, it raised fears of a protracted conflict in the region that could involve strategic attacks on oil fields.

In other markets, investments that are considered havens, such as gold and currencies like Japan’s yen, strengthened on the news.

The coming days could bring further pressure on assets that investors consider riskier, like stocks. It could also threaten a rally that began just a day ago in global markets.

Why did oil prices jump?

The killing of the Iranian Revolutionary Guards commander inevitably raises fears about further instability in a region that supplies about 25 percent of the world’s oil. While sanctions imposed by the United States have cut Iranian oil exports to a trickle, other critical oil producers, including Saudi Arabia, Kuwait, Iraq and the United Arab Emirates, are clustered around the Persian Gulf.

It remains to be seen how Iran will respond to the loss of a top leader, but there is widespread concern that whatever action Tehran takes might affect these crucial oil supplies and push prices higher.

“Iran’s ability to impact the U.S. will probably be mostly within the Middle East theater,” said Neil Beveridge, a senior analyst at Bernstein, a market research firm. “Iraq and Saudi Arabia are obvious targets.”

Tensions in the Strait of Hormuz

Tankers carrying most of the oil leaving the Persian Gulf region — about 18 million barrels a day — as well as giant vessels loaded with liquefied natural gas, must pass through the Strait of Hormuz, a narrow channel that separates the United Arab Emirates, Oman and Iran and leads to the Indian Ocean.

The strait is 21 miles wide at its narrowest point, and the width of the shipping lane in either direction is just two miles wide, according to United States Energy Information Administration.

Iran’s coastline covers much of the east side of the Gulf, leaving Tehran well-placed to harass shipping with small boats, missiles, mines and other weapons. Last year, Iran seized a number of tankers in the area in an apparent effort to show that if Tehran were not permitted to export its oil, then supplies from other producers in the area were at risk.

Market participants worry that Iran could step up such attacks on shipping, although such a move would be likely to bring a quick response from United States military forces in the area.

Other Vulnerable Points

Iran has other options for retaliating against Washington and its allies. It was clear in September that key Saudi oil installations could be knocked out with missile and drone attacks. Analysts worry about a similar strike by Iran, or a larger version.

Analysts also say that the oil installations of Saudi Aramco and other producers around the Persian Gulf could prove vulnerable to cyberattacks that might severely disrupt their operations.

Having just raised more than $25 billion through Aramco’s initial public offering, the Saudis have an interest in easing tensions in the region, and have been trying to solve problems like a long-running dispute over oil with Kuwait. But they could still find their oil industry under attack, analysts say.