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Oil prices surge on fallout from killing of Iran general in US air strike
OIL prices leapt as high as over 4 per cent on Friday as fresh geopolitical risk erupted on the third day of the new year after a US air strike on Baghdad airport killed Iran's most powerful general, triggering the threat of "harsh retaliation" from the Gulf nation.
The fallout saw the global crude benchmark Brent spike over 4.4 per cent to US$69.16 per barrel - its highest level since September - and the US benchmark WTI jump 4.3 per cent to US$63.84. By 5pm on Friday, oil's climb retraced a tad with crude prices up 3 per cent and just when the rally appeared to have stalled, the commodity shot back up to over 4 per cent as the evening progressed in Asia.
Following the Pentagon-led air strike that killed Qassem Soleimani, the Iranian general who led the Revolutionary Guards' Quds force, Iran's supreme leader warned of a "harsh retaliation", providing no further details and keeping the world hanging on tenterhooks.
The latest episode has tipped the scale more in favour of oil bulls amid rising optimism of a US-China trade deal, deeper production cuts by Opec and its allies as well as growing caution around US supply growth.
Still, some pundits are asking why hasn't crude convincingly breached US$70/barrel?
"The headline-grabbing Middle East smoldering powder keg has oil traders on heightened alert for any possible escalation that could threaten supply chains from Opec's No 2 producer, Iraq. Still, there's a sense of been-down-this-road-before reluctance that is holding back traders from chasing the bump higher in the global political risk index," remarked Jeffrey Halley, Oanda's senior market analyst, Asia Pacific.
Stephen Innes, chief Asia market strategist at AxiTrader said: "I'm a bit surprised we (crude prices) are not higher. For me, this has US$80 a barrel for Brent written all over it." He added that this may be led by some hope that the European Union and Japan could diffuse the situation.
Vandana Hari, founder of Vanda Insights, a Singapore-based provider of oil markets macro-analysis, said: "The market has factored in some risk to oil supply from the Middle East, but certainly not the worst-case scenario. It needs to wait and see whether Iran retaliates by disrupting production or shipments from the region. This wouldn't be the first time.
"An all-out war in the region is not our base case scenario," she added.
Even so, most analysts expect geopolitical risks to ratchet up with the festering US-Iran tensions, with one saying it sets the tone on how President Donald Trump's administration will handle Iran ahead of the US presidential elections this year.
"There is a chance that the US will continue to take a hardened stance against Iran, but the real fear is that the conflict will spill over into neighbouring Middle Eastern countries like Iraq, for example," said OCBC economist Howie Lee.
He added: "Supply disruptions will cause a spike in oil prices and that is the last thing the global economy needs as it embarks on its gentle recovery. It also serves as a reminder that for all the attention on the US-China trade war, pockets of tail risks still exist".
This could mean a sustained risk premium in crude, whose prices have also risen on the back of expansionary macro data from two of Asia's oil-importing behemoths - China and South Korea - which reported brighter factory activity in December, cementing the notion of a rebound in global growth.
Mr Innes warned: "Higher oil prices always throw a spanner into the works for Asia's colossal energy importers...
"This is more than just bloodying Iran's nose. This is an aggressive show of force and an outright provocation that could trigger another Middle East war. Indeed we are waking up to a less-safe world than it was only hours ago, especially if we combine this with simmering tension in the Korean peninsula".