Jan 3, 2020

Geopolitical risk storms back into oil markets

Ben Geman, author of Generate

Illustration: Sarah Grillo/Axios

Iran's response to the U.S. killing of Qasem Soleimani, a top Iranian military official, could target oil infrastructure and transit in the Middle East, analysts say.

Driving the news: The airstrike in Iraq that killed Soleimani pushed prices sharply upward last night and into this morning.

  • And they would likely go much higher if the conflict escalates, especially if major energy facilities are hit in response, though, needless to say, we don't know the scope of Iran's next steps.

The big picture: "[T]he killing of Soleimani calls for a serious increase of the geopolitical risk premium," Olivier Jakob of the consultancy Petromatrix tells the FT.

Where it stands: Oil prices are up almost 4% in the wake of the U.S. strike. The global benchmark Brent crude is trading at $68.76 per barrel.

Threat level: A note from the Rapidan Energy Group games out Iran's options and concludes the most likely scenario is that Iran will "first look for ways to recoup leverage short of targeting U.S. military personnel."

"That shifts risk back onto oil vessels and facilities. ... [T]he risk of another major attack against Gulf oil vessels or facilities is now above 50%."

What they're saying: Jason Bordoff, head of a Columbia University energy think tank, predicted via Twitter that Iran's response will be "severe" and "deadly" and "certainly may include escalating attacks on energy infrastructure."

But, but, but: Eurasia Group analysts predicted in a note that while Iran will certainly respond, it's "unlikely to immediately attack Saudi or Emirati oil infrastructure or US bases in Saudi Arabia, the UAE, Bahrain, or Qatar."

  • Overall, they're hardly ruling out a major military conflict, but expect "moderate to low-level clashes to last for at least a month" that are likely confined to Iraq.
  • They also expect Iran to harass and even temporarily disrupt commercial shipping in the Gulf.
  • "Prices will likely hold around $70/barrel but could make a run at $80 if the conflict spreads to the oil fields of southern Iraq or if Iranian harassment of commercial shipping intensifies," they write.

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