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Mon 6 Jan 2020 07:46 AM

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Oil hits $70 as Iran exits nuclear deal, tensions intensify

US said there's risk of attacks particularly in the eastern province of Saudi Arabia and near the Yemeni border

Oil hits $70 as Iran exits nuclear deal, tensions intensify

Oil’s 23% rise last year could already have taken it to levels that may not leave much room for further increase, according to analysts.

Oil extended its dramatic price surge as the fallout between the US and Iran escalated after the assassination of one of the Islamic Republic’s most powerful generals.

Futures jumped above $70 a barrel in London as the US State Department said there’s “heightened risk” of missile attacks near military bases and energy facilities in Saudi Arabia. Iran said on Sunday it no longer considers itself bound by the 2015 nuclear deal negotiated with the US and other world powers in the fallout from the killing of General Qassem Soleimani. Prices have risen about $4 a barrel since the airstrikes.

Oil’s wild ride continues as the US warning followed a weekend of bellicose rhetoric. President Donald Trump said he was prepared to strike “in a disproportionate manner” and attack more than 50 Iranian sites if Tehran retaliates against the killing of Soleimani, while the Middle East nation said it has to “settle a score with the US”

“Oil will remain on tenterhooks, ready to jump higher with every headline indicating a turn for the worse,” said Vandana Hari, founder of Vanda Insights in Singapore. “The US and Iran traded sequentially bigger threats over the weekend and Tehran has pulled out of the 2015 nuclear deal, marking a quick downward spiral in what could turn out to be the worst crisis in the Middle East since the Arab Spring.”

Brent for March settlement jumped as much as 2.2%, or $1.51, to $70.11 on ICE Futures Europe and was at $70.04 at 9:11 a.m. in Singapore. The contract surged 3.6% on Friday to end the session at the highest since Sept. 16. Brent rose 23% in 2019.

West Texas Intermediate for February delivery rose as much as 1.9% to $64.27 on the New York Mercantile Exchange and traded $1.14 higher at $64.19.

The US said there’s risk of attacks particularly in the eastern province of Saudi Arabia and near the Yemeni border and close to military bases as well as oil and gas facilities, the State Department said in a tweet.

In response to the killing of its top military commander, Iran’s government said it will no longer abide by any limits on its enrichment of uranium nuke, while Iraq’s parliament voted to expel US troops from the nation.

In a separate event, an American service member and two contractors were killed in a Sunday attack on US counter-terror forces in Kenya, with al-Qaeda-linked al-Shabaab militants claiming responsibility for the act. The raid came after a US airstrike killed several members of the Somalia-based group, even as more troops are being dispatched to the Middle East.

Rising tensions between the US and Iran have already caused unprecedented disruptions to oil markets, but so far they’ve been short-lived. Last year, Washington blamed Tehran for sabotage attacks on supertankers and a missile and drone attack on Saudi Arabia’s Abqaiq crude-processing plant in September - the largest single supply halt in the industry’s history.

Tough talk

Trump’s tough talk over the weekend followed Iran’s threat of a protracted response, and eclipsed his assertion a day earlier that the US hadn’t launched the attack near Baghdad airport on Thursday to “start a war.” The president is also sending more troops to the Middle East.

The Iranian leadership has signalled that it will probably target US military installations and bases in the Middle East and mobilize its network of militias across the region.

Iraq is the second-largest producer in the Organization of Petroleum Exporting Countries, pumping 4.65 million barrels a day last month. Its immediate neighbours in the region -- Saudi Arabia, Kuwait and Iran -- together produce about 15 million barrels a day. Most of their exports leave the Persian Gulf through the Strait of Hormuz, a narrow waterway that Iran has repeatedly threatened to shut down if there’s a war.

Beyond crude’s rise, there were other signals in the market that people were preparing for further disruption.

Volatility rose to its highest level in a month and the cost of derivatives that insure against price spikes increased. Four million barrels of options contracts that would profit from a jump in Brent crude to $95 a barrel traded for both March and September. The cost of insuring tankers could rise again, after it surged in the wake of the Abqaiq attack in September.

Less room

Still, oil’s 23% rise last year could already have taken it to levels that may not leave much room for further increase, according to analysts.

“The oil market always assumes the worst, so a lot of the general risk is already priced in,” said Jaafar Altaie, managing director of Abu Dhabi-based consultant Manaar Group. “Prices at $70 a barrel already assume the worst-case scenario and we see them holding there, in a range from $60-$70, for the first quarter.”

The greatest risk to supply would be an attack on Iraq’s southern fields, he said. Iran would likely continue to target tankers and energy infrastructure in the region as it’s accused of having done in recent months, Christof Ruehl, a researcher on energy and policy at both Columbia and Harvard universities, said on Bloomberg television Sunday.

“They’re walking a tight rope” and face retaliation if they react too forcefully, Ruehl said.