Crude Oil Prices Climb on US Airstrikes, Iran's Response in Focus

January 03, 2020 at 07:08AM

Crude oil prices were significantly stronger on news that US forces had killed a prominent Iranian leader in Baghdad. The response from Tehran is now in focus. Continue Reading…

Crude Oil and Gold Talking Points:

  • Crude oil prices spiked up on news that a key Iranian general hand been killed in a US drone strike
  • The attack has put Middle Eastern geopolitics firmly back on the radar
  • Gold prices made strong gains too, but look very stretched

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Crude oil prices got a sharp boost Friday as news that the United States had killed a key Iranian military leader, among other figures, in an airstrike on Baghdad.

General Qassim Soleimani was the leader of Iran’s Quds Force, an elite unit within the Revolutionary Guard Corps. He died in the strike as did Iraqi paramilitary commander Abu Mahdi Al-Mohandes. Some sources have claimed that a deputy leader of the Lebanese Hezbollah was also killed. The attack came after days of escalating tensions in the region, and the storming of the US embassy in Baghdad.

US crude oil prices rose by well over two dollars a barrel in the aftermath. Such rises on increased Middle Eastern tensions are not uncommon as investors weigh the effects of any conflict escalation on supply in this crucial region for energy markets. Iran for its part has threatened retaliation.

Oil prices were already supported by hopes for progress on trade between the US and China, with a phase one trade deal still apparently set for signing on January 15. Moreover, production cuts from traditional producers were announced last year and set for application this month. They too are underpinning prices.

However, Friday’s action saw a broad slide in risk appetite with most sock markets taking fright at the US action. This seems to have capped gains for oil prices which are now well below their session peaks.

Crude Oil prices, 5-minute chart

Broadly prices remain well within the uptrend channel which has dominated the market since the start of October and taken prices back up to September’s highs. Assuming global risk appetite will let them, investors will look to the next US inventory data which are coming up on Saturday for the Asia Pacific region. Markets will pay very close attention to these given the run of surprising drawdowns seen in the last two weeks.

Gold Soars as Risk Aversion Kicks Back In

Gold prices got an unsurprising lift from Friday’s events as investors sought safety in such countercyclical assets.

Gold prices, daily chart.

The impetus was strong enough to take the market right up through a resistance zone which had previously capped it, and back up to within striking distance of 2019’s highs. It’s worth noting, however, that prices’ strong acceleration since late December has taken them into severely overbought territory. Gold looked in need of some consolidation before it spiked up on Friday, it looks even more in need of it now. Some caution will be warranted as markets return to full, post-holiday strength next week.


Iran supreme leader, Ali Khamenei, warns the US of retalation

Iran US
  • Harsh revenge awaits “criminals” who killed Soleimani
  • The killing will double the motivation of the resistance against the US and Israel
Words like this will keep the risk mood more defensive ahead of the weekend and will fuel more risk aversion in markets. I don’t think this is one that market participants may move on too quickly from as we could see Iran respond at any given time.
The Santa Claus rally in the stock market already gave investors a reason to be more cautious and maybe to engage in some profit-taking so the events today will just help to make up their minds on the matter. At the same time, there’s no rush to get back in just yet.

Yen leads gains in the major currencies space

WCRS 03-01

The US airstrike in Baghdad killed a top Iranian military commander and that has sparked a major escalation in US-Iran tensions to start the new year. As a result, markets leaned towards being more risk averse with flows going into haven assets.
The yen and gold are among the major beneficiaries, alongside bonds while risk currencies and equities are bearing the brunt of the more negative risk sentiment to start the day.
Oil is also a solid mover, gaining by about 3% as Middle East tensions continue to stir the pot and I reckon the event here will be a key litmus test for the stability of oil prices in Q1.
Looking ahead, I would expect markets to keep with the more risk averse tone as tensions are running high now and there’s a lot of steam surrounding the issue. But I would not expect this to lead to an all out war between US and Iran whatsoever.
Tensions are no doubt high but the battle will be fought via an assortment of tools from a military, economic and civilian point of action – not just purely involving weaponry.
As such, this is something that markets will have to learn to be accustomed to over time rather than expect a major military retaliation in response. We’re living in different times compared to a few decades ago and so geopolitical reactions are also very much different.
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