Iran vs U.S: Oil Prices Spike in Wait of Tehran’s Retaliation

Iran vs U.S: Oil Prices Spike in Wait of Tehran’s Retaliation

The early hours of Friday came with the most interesting news of the year, the killing of the commander of Iran’s Revolutionary Guards Corps, Maj. Gen. Qassim Soleimani, on the orders of the U.S. President, Donald Trump.

Gen. Soleimani was killed by a drone strike in Baghdad amid heated tension between the U.S. and Iran. Earlier in the week, members of the Revolutionary Guard occupied the premises of the U.S Embassy in Iraq, until Trump sent reinforcement troops to disperse the protesters.

The two countries have been at loggerhead over nuclear weapon’s development by Tehran, and the tension escalated as the Trump administration annulled the nuclear deal secured by the Obama administration that restrained Iran from further enriching its nuclear plant with more uranium.

The strike has added to the grudge that was regurgitated by the death of American contractor, killed in Iraq in late December.

Gen. Soleiman was the genius behind many activities of Iran’s revolutionary movement and his death has become unacceptable to Tehran that they have announced plans for retaliation.

Tehran convened an emergency security meeting where after, the country’s supreme leader called for three days mourning and retaliation.

“His departure to God does not end his path or his mission. But a forceful revenge awaits the criminals who have his blood and the blood of the other martyrs last night on their hand,” the statement from Iranian leader, Ali Khamenei said.

The United States and its allies are bracing up for retaliation: A possible Iranian strike, cyber-attack or probably Tehran-backed terrorist attack.

Meanwhile, one notable outcome of the Soleimani’s death has been a spike in crude oil prices. The price went up 4 percent as soon as the news broke, and Iran’s announcement for retaliation has made sure the global benchmark jumped 4.3 percent to $69.08 per barrel. U.S oil futures gained 4.1 percent to reach $63.69 per barrel.

This is the highest surge in oil gains in months, spurred by political tension that nobody knows how long it will last. However, response from Iran is expected to keep the suspense on and the price of oil hanging right on top of the political tension.

Jeffrey Halley, senior market analyst for Asia Pacific at Onda, pointed out in a research: “An indirect response is the most apparent course of action, and oil installations and tankers were my first thoughts,” he said.

In September last year, a devastating attack on Saudi Aramco’s oil facility left a debilitating effects that instigated a sudden spike in oil prices. The U.S oil futures jumped 14.7% to settle at $62.90 per barrel. The futures of Brent crude, the global benchmark, settled up 14.6% at $69.02 per barrel. Gasoline futures were also up more than 13%. It was the highest rise in the oil industry since January 2009.

But the prices went back down upon Saudi Government’s assurance that its oil reserves will be enough to meet supply demand until the damaged facilities are rehabilitated. Donald Trump also authorized the use of oil from the U.S emergency supply (Strategic Petroleum Reserve) to keep the markets’ supply flowing.

A spate of attacks in June last year demonstrated the kind of impact Thursday night’s incident in Iraq could have on global oil. Two ships carrying oil were struck near the Strait of Hormuz, in the Gulf of Oman, a strategic Choke point for roughly 30% of the world’s sea-borne crude oil tankers. It caused a temporary rise in the price of oil globally. The incident only highlighted how important the Middle East region is to the oil industry.

The Strait of Hormuz commands the passage of nearly 30% of oil moving over the world oceans. There are only two shipping channels in the passage that can handle supertankers, and they are only two miles wide heading in and out of the Gulf, giving ships no other options than to pass through Iranian and Omani territorial waters.

With its territorial capacity, the region is commanding roughly 80% of crude oil destined for Asia, and it has been noted as the reason for the enhanced output in the U.S oil. So the world economy would be in jeopardy without it.

Analysts at the Eurasia Group pointed that possible Iranian retaliation may be centered on disrupting oil activities in the Gulf region.

“Iran will also likely resume harassment of commercial shipping in the Gulf and may launch military exercises to temporarily disrupt shipping,” they noted.

In the event the analysis comes true, oil price is likely going to spike further globally. But one thing uncertain is how long the faceoff between the U.S and Iran will last, and if the spike will be sustained.

Investors are turning to bonds in gold that has shown consistent growth for the past four months as the realities from Bagdad hit stock markets. The index is seeing a notable drop in Europe, and foreshadowing a bleak future if the escalation is not contained.

Investment director at AJ Bell, Russ Mould noted: “It’s never likely to be good news for the markets when ‘World War III’ is trending on Twitter.”

The stability of the world economy is solely waiting on what Iran does in retaliation to the killing of its General.

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