Abu Dhabi: The escalation in US-Iran tensions could see oil prices rising over the next week with fears of a wider conflict breaking out between the two countries, analysts said.
Oil markets on Friday closed with Brent trading at $68.60 and West Texas Intermediate (WTI) on $63.05, with both benchmarks closing on a fifth straight weekly high.
Much of last week’s spike in oil prices was driven by US-Iran related events following the death of Iran’s Quds Force commander Qasim Soleimani in Iraq by a US air strike. The Quds Force is the external arm of Iran’s Revolutionary Guard Corps and is responsible for all of its external operations.
Iran has vowed to retaliate against the US, with president Donald Trump tweeting in the early hours of Sunday, warning Iran that 52 sites inside Iran would be attacked by the US should Iran follow through with their threats on American sites or interests.
“After a 2019 that was peppered with high risk geopolitical events, 2020 appears to be starting as intensely. Benchmark futures prices spiked in response to the news with Brent touching an intraday high of $69.50 per barrel and WTI moving up over $64 per barrel,” said Edward Bell, commodity analyst at Emirates NBD.
“Oil futures have gained for eight of the last nine weeks, bolstered by optimism that the China-US trade war would come to an end and now receiving support from a revived geopolitical risk premium,” he added.
“The immediate fear in oil markets is whether supplies flowing out of the Gulf region or from Iraq are disrupted, either from the Strait of Hormuz being blocked or pipelines being cut,” Bell said, highlighting what oil market’s will be looking for during the week.
“However, like we saw in 2019, the impact of risk events themselves on oil prices can be fairly short-lived if markets do not assess any substantial change to physical flows,” he added.
“The risk of prolonged tensions between the US and Iran, with the potential for escalation, will act like the US-China trade war in reverse: as markets are wary that further attacks could be forthcoming, prices may have an upside bias in the short-term,” he said.
Ole Hansen, head of commodity strategy at Saxo Bank, said oil markets would be following Iran’s response during the week. Iran this week is also set to announce its latest scaling back of its nuclear deal commitments under the JCPOA. “Oil has extended further on Friday following the US strike against an Iranian general in Baghdad. Middle East tensions once again raise risk of supply disruptions. “These developments signal a worrying escalation in the Middle East with the markets now awaiting the response from Iran,” he added.
“The market reaction has been swift with Brent crude oil reaching … the highest level since the September Aramco attacks in Saudi Arabia,” he said.