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Iran crisis fuels fear over Middle East oil supplies

The burgeoning Iran crisis has sparked oil supply worries over the Strait of Hormuz-a vital shipping lane for a fifth of global crude-and also over Iraq’s output, analysts say. Oil prices had surged last Friday after US President Donald Trump ordered the drone assassination of Iran’s top general Qasem Soleimani, but the market stabilized on Monday and Tuesday with the Middle East crude supplies unaffected.

However yesterday, the oil market shifted higher once more after Tehran launched revenge attacks to target US forces in Iraq, making good on its pledge to hit back over the killing. Iran fired missiles overnight at Iraqi bases housing the US and British military, officials in Washington and Tehran said.

British Foreign Secretary Dominic Raab voiced concern over “reports of casualties”. But Iranian Foreign Minister Mohammad Javad Zarif insisted that the country does “not seek escalation or war”. Traders remain fearful nevertheless that Tehran could seek to block the Hormuz waterway-a key artery for crude that stretches between Oman and Iran. Hormuz, one of the world’s most congested transit points, links up the region’s oil producers with markets in Asia, Europe, and North America.

Disruptions at forefront

“Supply disruptions were put at the forefront of the agenda for investors,” said Mihir Kapadia, CEO of Sun Global Investments. “These concerns have been fuelled by Friday’s killing of Soleimani and it is likely Iran will try and disrupt oil exports that travel through the Straits of Hormuz. “However … it remains unclear as to what the next developments will be.” The US government’s Energy Information Administration describes Hormuz as “the world’s most important oil transit chokepoint” through which 21 million barrels of crude per day passed in 2018.

The strait had already been rocked last year by a string of attacks that Washington and its allies blamed on Iran, accusations Tehran firmly denied. Its Western foes have also accused Iran of being behind a major attack on Saudi oil installations and Iran has in recent months also repeatedly seized tankers operating in the Gulf. Traders remain less fearful over the loss of Iranian oil because the Islamic republic remains under punishing US sanctions that were re-imposed by Trump in 2018.

Energy Aspects analyst Christopher Haines noted traders were instead worried about oil output from Iraq-particularly if US troops are pulled out. America’s military strategy in Iraq was thrown into confusion Monday as the Pentagon admitted a letter from a general informing the Iraqi government of an imminent US troop pullout was sent by mistake. “There is a potential risk of disruption on Iraq, whose crude exports represent (about) 3.5 million barrels per day,” Haines said. “If US troops leave, it will leave the area less secure,” he added.

‘Not single drop lost’

“Eventual loss of supply in the Middle East may, however, be in Iraq down the road and not so much due to near term retaliations, though so far not a single drop of oil supply has been lost,” he said. Soleimani’s assassination, which was carried out by a drone near Baghdad airport, sparked concern about a spreading conflict. Europe’s benchmark oil contract Brent and US counterpart West Texas Intermediate crude had initially won more than three percent each on Friday. However, those gains fell far short of September 16, when both contacts had rocketed about 14 percent on news of attacks on Saudi Arabian oil infrastructure.

Meanwhile, world oil prices dipped yesterday in afternoon European trading, after briefly spiking when Iran launched missile attacks on US targets in Iraq. The strikes, launched in retaliation for the assassination of Iran’s top general last Friday, sent Brent and New York crude to multi-month peaks before profit-taking and experience prevailed. Iran said it had “concluded” its missile attacks for now, and analysts pointed out that oil traders had many sources at their disposal in any event.

“Sooner or later investors will realize that the plentiful non-OPEC supply will more than makeup for any short-term disruptions in the Middle East,” noted market analyst Fawad Razaqzada. SEB analyst Bjarne Schieldrop added that “not a single drop of oil supply has been lost due to the recent incidents and this is why the oil price has fallen back down again so quickly. What the market fears are that the situation spirals out of control.”

Global stock markets initially slid on investor concern of a broader conflict, though many were in positive territory in afternoon trades. London stocks were the outlier, down by almost 0.2 percent, while Frankfurt gained 0.5 percent and Paris was slightly higher as well. analyst Neil Wilson remarked that “at present, you sense traders are sitting on their hands a bit while they wait for the US president to respond officially to the Iranian attacks.”

Safe-haven assets fared well initially, but after surging above $1,600 an ounce for the first time in six years, gold fell back to $1,573.60 which represented a slight loss on the day. Iraq is currently the second biggest player in oil cartel OPEC after kingpin Saudi Arabia. SEB analyst Bjarne Schieldrop agreed that Iraqi production could be impacted by the current crisis-but so far no oil supplies have been affected. 

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