Oil markets in turmoil after Iran attacks reignite supply fears

London: Oil prices jumped back above $70 a barrel after Iran attacked two US-Iraqi bases in its first response to the killing of its top general, before paring much of their advance as Tehran signalled the strike was over.

Futures in London initially surged more than 5 per cent as the Islamic Revolutionary Guard Corps claimed responsibility for the missile strikes, which the Pentagon said were launched from Iran. Prices then pulled back after the country’s foreign minister said it had “concluded proportionate measures in self-defence” and US President Donald Trump tweeted that “all is well” following the attacks.

While oil flows from the Middle East continue to be unimpeded for now, the risk the conflict will disrupt global supplies is spooking the market. Most crude exports from the Arabian Gulf, including shipments from Saudi Arabia, Iran and Iraq, go through the Strait of Hormuz, a narrow waterway that Iran has repeatedly threatened to shut down if there’s a war.

The impact of the strike also spilled over into other assets, with gold surging to the highest level in six years, while US and European stock futures declined.

Oil has had a dramatic start to the year, triggered by the US air strike that killed General Qasim Soleimani last week. Iran said on Tuesday it was assessing 13 possible ways to inflict a “historic nightmare” on America after the assassination of the military commander near Baghdad’s international airport.

“We’re at a point where supplies from the Middle East could be disrupted at any moment as tensions escalate further after Iran’s retaliation,” said Kwangrae Kim, a commodities analyst at Samsung Futures Inc. “Oil markets could see another jump, depending on how the US responds. We should be bracing for a volatile ride.”

Brent crude rose as much as $3.48 to $71.75 a barrel before trading 0.9 per cent higher at $68.85 on the ICE Futures Europe exchange as of 7:26am in London. West Texas Intermediate climbed as much as $2.95, or 4.7 per cent, to $65.65 on the New York Mercantile Exchange, later retreating to $63.12.

It wasn’t immediately clear whether there were fatalities or major damage from the Iranian attacks. Futures tempered their initial reaction after Iranian Foreign Minister Mohammad Javad Zarif said on Twitter that the country is not seeking “escalation or war.” Trump said in his Twitter post that battle damage assessments continued and that he would make a statement Wednesday morning in the US Opec is confident that Middle East leaders are doing everything possible to restore calm in the region, Secretary-General Mohammad Barkindo said after the attacks. Iraqi oil facilities remain secure, he said.

Investors are paying up to protect against higher prices after the strikes. Call options on WTI — which allow the holder to buy futures at a set price — are at the biggest premium to puts since September, when it spiked in the wake of attacks on Saudi Arabian oil sites. Implied volatility — a key measure of how expensive the options are — reached the highest since early December.

“If Iran seeks further targets for retaliation to the killing of Soleimani, but without crossing declared US red lines that would prompt a military response, energy infrastructure may be appealing,” said Jason Bordoff, a former Obama administration official who now works at Columbia University. An actual supply disruption would send prices soaring, depending on the magnitude and expected duration of the outage, he said.

While there’s nervousness around the safety of shipments through the Strait of Hormuz, there’s still a comfortable oil supply cushion. Opec is sitting on huge amounts of spare capacity after reducing supplies for most of the past three years and the US, the world’s largest crude producer, recently reported its second consecutive month as a net petroleum exporter. Big oil consumers including the US and China also hold millions of barrels in strategic reserves that can be deployed to offset any shortage.

The risk premium is “likely to come back into place,” Daniel Hynes, a senior strategist at Australia & New Zealand Banking Group Ltd., said in a Bloomberg TV interview. “The risks to ongoing disruptions in the industry are very high.”