By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices jumped to the highest level in more than three months on Friday after the United States killed a top Iranian military commander in Iraq, sparking fears that escalating conflict in the region could disrupt global oil supplies.
An air strike at Baghdad airport killed Major-General Qassem Soleimani, architect of Iran’s spreading military influence in the Middle East, prompting Iran’s supreme leader, Ayatollah Ali Khamenei, to vow revenge.
Brent crude ended the session up 3.6% or $2.35 at $68.60 a barrel, off the session peak of $69.50, the highest level since the mid-September attack on Saudi oil facilities.
West Texas Intermediate (WTI) crude settled up $1.87 or 3.1% at $63.05 a barrel. The session high was $64.09 a barrel, its highest since April 2019.
U.S. President Donald Trump on Friday said that Soleimani was planning to kill Americans.
Tensions between the United States and Iran have flared over the past year as Washington reimposed sanctions on Tehran and in the aftermath of a missile and drone attack on oil installations of the Saudi Aramco company for which U.S. officials blamed Iran.
The Soleimani killing has brought those tensions back to the forefront, fanning worries about a squeeze on crude supplies, though the effect of the increased geopolitical risk remains unclear.
“The market is trying to assess whether we’ll see a supply disruption, if any,” said Andy Lipow, president of consultants Lipow Oil Associates.
“Iran has already seen their exports cut to minimal volumes; they have little to lose in the way of crude oil exports.”
More than 840,000 front-month WTI contracts changed hands, while Brent trading volumes surpassed 464,000 lots, both the highest since the Saudi attacks.
Concern shifted to potential retaliation as the United States is sending nearly 3,000 additional troops to the Middle East as a precaution amid rising threats to American forces in the region, U.S. officials said.
“The Iranian retaliation could take the form of a quick response by proxies against U.S. allies and assets. One-off incidents targeting Gulf oil flows are possible, as are attacks on Gulf oil infrastructure, after the Abqaiq incident did not trigger a U.S. military response,” said Paul Sheldon, chief geopolitical risk analyst at S&P Global Platts.
The U.S. embassy in Baghdad on Friday urged all citizens to depart Iraq immediately, and dozens of U.S. citizens working for foreign oil companies in the Iraqi oil city of Basra were preparing to leave, company sources told Reuters.
All oil fields across the country were operating normally and production and exports were not affected, Iraq’s Oil Ministry said in a statement. It said no other nationalities were departing.
The oil futures market is already beginning to price in near-term supply tightness. The spread between the December 2020 and 2021 U.S. crude futures contracts as well as the corresponding spread for Brent, popular trades in oil markets, surged to the highest level since October 2018.
“If the situation worsened, and oil supplies were disrupted, this could have broader economic and financial market impacts through a sharp rise in crude oil prices,” UBS Global Wealth Management’s chief investment officer, Mark Haefele, said in a note.
“However, spare capacity in oil remains adequate (OPEC’s and Russia’s spare capacity is around 3.3 mbpd). And, we still expect an oversupplied oil market in 2020.”
Oil prices also found support after data showed weekly U.S. crude stockpiles fell by the most since June.
(Reporting by Devika Krishna Kumar in Chicago, Bozorgmehr Sharafedin in London, additional reporting by Florence Tan and Seng Li Peng in Singapore; Editing by Alistair Bell and Matthew Lewis)