After a slow week of trading, investors might have remained in holiday mode, but the oil price fared well with both benchmarks gaining.
The geopolitical landscape of the Middle East is back in focus with Iraq the middle of the fray and the US posted another week of lower stocks. In Friday trading, Brent crude was priced above US$69 with WTI (West Texas Intermediate) close to US$64 a barrel.
The US President, Donald Trump ordered an airstrike at Baghdad International Airport, killing a top Iranian general, Qasem Soleimani, who was the senior commander of the Quds Force of Iran’s Islamic Revolutionary Guards.
Very public threat
The strike followed a very public threat sent by Twitter earlier in the week from President Trump.
Opposition forces have been demonstrating in Baghdad with many attacking and occupying the compound of the US Embassy and setting it alight. Last week there was an attack on a US compound with one fatality, followed by the Embassy attack response and consequently followed by this week’s killing of one of Iran’s most senior military and strategic political players.
The Pentagon announced that it had knowledge that Soleimani was a threat to US security and knew that he was developing plans to attack American diplomats and service members.
High profile killing
The killing of such a high profile general brought a harsh reaction from Iranian President Hassan Rouhani, saying he would take revenge on the US for this act.
This situation does not bode well for peace and stability in the Middle East region with many fearing an escalation of conflict in the weeks to come. Both leaders have said they do not want war, but the latest tit-for-tat escalation will be difficult to resolve with Iran saying this latest action will make Iran "more decisive in its resistance".
The ongoing conflict began many months ago and has seen attacks on major Saudi Arabian oil facilities as well as earlier attacks on oil tankers near the Strait of Hormuz in June.
The US has deployed additional military people to the region with many more on standby. Naturally any escalation in violence and further American involvement has the market nervous but analysts worry about oil installations and the lives of workers and US army personnel.
An immediate evacuation of all American citizens from Iraq has been ordered by the US Embassy. Britain has called for a de-escalation in tensions.
Any blockage of oil shipments through the Strait of Hormuz will impact the oil price to the upside. Countries will now be thinking about increasing security for all ships in transit. Any escalation in violence in Iraq and Iran will have the danger of the contagion impact in the region. Countries in the Middle East have declared sides over the years, so the worry is an escalated regional conflict that no-one desires.
US crude inventories down
Looking at the fundamentals, the American Petroleum Institute said that crude inventories were down by 7.8 million barrels last week.
This is now the largest decline in supplies since August and much higher than most analysts had expected.
The trade talks between the US and China should get signatures for the first phase of the deal on 15th January. This positive news has helped to bolster the market, especially after President Trump announced he would go to China to start talks on phase 2 of the deal.
Investors hope this will introduce a sense of stability into the markets, but more importantly set the seeds and begin to demonstrate economic growth for all countries.
Both benchmarks rose more than 4% this week given the fragile state of the geopolitics involving the US and Iran.
The trend could stay high in coming weeks given the seriousness of the situation. There may be no immediate response from Iran in the week to come, but analysts have warned that the US can expect some sort of revenge in weeks to come.