Oil prices spiked on 3 January on news that Qassem Suleimani, commander of Iran’s elite Quds Force and architect of its growing military influence in the region, was killed at Baghdad’s airport during a drone airstrike authorised by US President Donald J. Trump, a move that has heightened geopolitical tensions. Traders fear a retaliation from Iran could disrupt world access to oil supplies.

Brent crude, the international benchmark, hit $69.16 a barrel, its highest since 17 September, before easing to $68.54, up $2.29 or 3.4% by 0947 GMT, Reuters reported. West Texas Intermediate (WTI) crude, the American benchmark, was up $2.10 or 3.4% at $63.28 a barrel, having earlier spiked to $63.84 a barrel, its highest since 1 May.

The killing of Suleimani heightens fears about further instability in a region that supplies about 25% of the world’s oil. It remains to be seen how Iran will respond to the loss of a top leader.

“Today’s oil price jump was an inevitable knee-jerk reaction to the killing of Soleimani,” Chris Weafer, founding partner of Macro-Advisory, a Moscow-based business and investment consulting group, told New Europe on 3 January, adding that the tense backdrop created will keep the price elevated over the next few weeks as the rhetoric from Tehran will become ever more threatening against the US, Israel and, most likely, against Saudi Arabia and its Gulf allies.

“But oil traders will be wary of pushing the price too high or for too long,” Weafer said. “We have seen many times since the 1990s events that spiked oil but these have rarely supported the high price for too long. It has always been a mistake to buy oil into such a price spike,” he added.

The question for oil traders, according to Weafer, is relatively straightforward: is there a risk that significant oil supply will be cut and how quickly may that lost oil be replaced from other sources?

Major oil supply disruption unlikely

He reminded that Iran is no longer an official oil exporter so that is no longer a factor. Iraqi oil could be disrupted in the event of a conflict escalation in that country but a major disruption is unlikely. Weafer said, adding that oil infrastructure is very heavily protected in Iraq and the country also has multiple export routes via Turkey and Saudi in addition to the Gulf.

The immediate price hike on 3 January was among the largest since an attack on a key Saudi oil installation in September temporarily knocked out 5% of the world’s oil supply.

Traders are also concerned that Tehran may try to disrupt oil tanker traffic in the Persian Gulf via the Strait of Hormuz, off Iran’s southern coast, which is the only way to move oil from the Persian Gulf to the world oceans.

“The major concern, and focus of attention for oil traders, is the risk of an attack against Saudi oil infrastructure or any attempt to disrupt Gulf tanker traffic,” Weafer said. “Here also any such disruption would be difficult, especially after the attacks against the oil tanker in June and against Abqaiq in September. Defensive measures will have been stepped up significantly since,” he added.

“Bottom line is that the tense backdrop should keep Brent trading in the $65-$70 per barrel range in the coming weeks,” Weafer said, adding that anything higher is unlikely without a sustained disruption some major export infrastructure. If nothing material happens in the oil sector then Brent is more likely to be trading in the $60-65 per barrel range in February.