Deadly attack by US on Iranian general rattles energy market

Crude prices on Friday had the largest one-day spike since a September attack on the world’s largest oil-processing facility in Saudi Arabia after the US killed Iran’s top general in a drone strike.

If sustained, the rise in oil prices could push the cost of gasolene, heating fuel, and electricity higher, potentially dragging on the global economy at a time when it is already slowing.

The international benchmark for crude oil at one point jumped almost 4 per cent per barrel in London. US crude prices increased about the same.

The timing of escalating tensions in the Middle East could be economically troublesome worldwide, and particularly for the US and China, which are expected to sign off on a “Phase 1” trade deal within weeks. The agreement could energise the industrial sectors of both economies. The industrial sector accounts for the largest share of energy consumption, meaning that any sustained increase in prices could dampen the economic effect of a deal.

Another sector that consumes vast amounts of energy, the airline industry, was hit immediately on Friday, with shares of Lufthansa in Germany, and also Air France, falling between 7 per cent and 8 per cent. American Airlines slid 4 per cent.

Most international affairs experts anticipate Iranian retaliation after Gen. Qassem Soleimani, head of Iran’s elite Quds Force, was killed early Friday in an air attack at the Baghdad international airport.

Iran could retaliate with cyber attacks or, as it did last week, target US installations in the Middle East. Angered by deadly airstrikes targeting an Iran-backed militia, dozens of Iraqi Shiite militiamen and their supporters broke into the US Embassy compound in Baghdad last week in one of the worst attacks on the embassy in recent memory.

But on the southern border of Iran lies the Strait of Hormuz, the world’s most important oil chokepoint, according to the US Energy Information Administration. About 20 per cent of crude traded worldwide must pass through this shipping lane, which is only 3 kilometers (2 miles) wide. Tankers have come under attack this year in the strait, and Iran maintains a heavy presence.

“Revenge will come, maybe not overnight, but it will come, and until then, we need to increase the geopolitical risk premium,” Olivier Jakob, head of consultancy Petromatrix, said in a note to investors.

The US directly blamed Iran for a September 16 attack by Yemen’s Iran-backed Houthi on the Saudi facility. Iran denies it was involved.

The attack illustrated how big an impact disruptions to supplies can have on the market. The strike briefly took out about half of the supplies from the world’s largest oil exporter.

Launching attacks that can’t be easily linked back to Iran limits the chances of direct retaliation.

However, Iran has directly targeted tankers. This year, it seized a British-flagged tanker, the Stena Impero, on July 19 in the Strait of Hormuz. And it has shot down a US military drone.

“The factors in the market pushing oil prices higher are based on the view that Iranian authorities collectively, or the Islamic Revolutionary Guard Corps, independently, could potentially take retaliatory actions that increase the likelihood of supply disruption in the Middle East,”said Edward Morse, an analyst with Citi.

“Hypothetical scenarios of retaliatory actions might include targeted attacks on oil facilities in the Gulf area, whether in Iraq, where there are Western/American firms investing in new production, or elsewhere; attacks on pipeline oil flows or shipping through either the Strait of Hormuz or the Red Sea; or even surrogate attacks from Lebanon on Israel or from Yemen on Gulf countries, not necessarily targeting oil, but resulting in retaliatory actions on Iran.”

Morse said international benchmark crude, which has been hovering around $60 per barrel all summer, could push past $70 “in short order.”

About 80 per cent of the crude oil that travels through the Strait of Hormuz goes to countries in Asia, including China, Japan, India, and South Korea.

But the rise in the global price of oil is likely to have a wider effect, particularly in oil-importing countries with big manufacturing sectors like Germany. Its stock market fared worst on Friday, falling 1.2 per cent.

AP