Crude prices soar on Middle East tensions

News that a military strike in Iraq by US forces killed a top Iranian general sent crude oil prices soaring on Friday and lead analysts to warn it could lead to direct conflict between Tehran and Washington this year and further price increases.

Crude prices have soared on news the US military has killed Major-General Qassem Soleimani at direction of US President Donald Trump.
Crude prices have soared on news the US military has killed Major-General Qassem Soleimani at direction of US President Donald Trump.Credit:Michele Mossop

General Qassem Soleimani, head of Iran’s elite Quds Force, was killed by US drone strike at Baghdad’s international airport on Friday, a decision the US Department of Defence said was approved by US president Donald Trump in response to previous attacks orchestrated by Soleimani on American citizens across the Middle East region.

“General Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region,” it said in a statement released late Thursday in the US.

According to Iraqi officials, the strike also killed Abu Mahdi al-Muhandis, deputy commander of Iran-backed militias in Iraq known as the Popular Mobilisation Forces, or PMF.


The news saw front-month WTI crude futures spike as much as 4.4 per cent to $US63.84 ($91.24) per barrel, briefly sending prices to the highest level since April 30, 2019.

Brent crude futures for March delivery also jumped 4.4 per cent to $US69.16 per barrel, touching levels last seen in mid-September when a rocket attack damaged key Saudi oil facilities, an event which at the time sparked widespread fears of extended production losses from the world’s largest crude exporter.

Reflecting increased concern about a potential regional conflict following the US strike, spot gold prices jumped to $US1,540.49 an ounce in Asia, hitting highs not seen since early September last year.

Long-dated government bonds were also in high demand, including in Australia where benchmark 10-year yields skidded to 1.267 per cent, according to Refinitv, leaving them around 15 basis points below the highs hit on Thursday.

The Japanese yen and Swiss franc, well known for their safe-haven attributes during times of increased uncertainty, also rose while currencies closely aligned to the performance of the global economy such as the Australian and New Zealand dollars, fell by close to half a per cent.

Having managed to navigate geopolitical tensions created by the US-China trade war in 2019, analysts at RBC Capital Markets warned clients that Iraq could act as a potential “tripwire” for direct military conflict between the US and Iran should confrontations between the two sides continue.

“There are roughly 5,000 US troops serving in close proximity to these militias, who operate alongside the Iraqi military. Hence, there is an ever-present risk that Iraq would be the theatre where the struggle between the US and Iran would play out,” said RBC Capital Markets’ head of global commodity strategy Helima Croft.

“As long as Iran remains subject to severe US sanctions — which are sharply upping the economic misery index and causing considerable domestic discord — Iran’s leadership will look to increase the costs for Washington continuing to pursue the maximum pressure policy.”

Ms Croft said American oil companies operating in Iraq could find themselves “caught in the crossfire” from any further escalation in the conflict, increasing the potential for supply disruptions and higher crude and petrol prices.

“Iraq ranks near the top of the oil supply disruption risk in 2020 in our view,” she said. “With trade wars fears receding, the heightened tensions in the Middle East may be poised to make a more meaningful impact on the oil market in 2020.”

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