Recent oil spike expected to be contained
After US President Trump directed the killing of top Iranian general Qasem Soleimani in a drone attack at Baghdad airpot during last week oil prices have spiked higher. The reason for the spike in oil prices has been the concern that Middle East shipping, pumping and production facilities could become targets. If these areas were targeted that would result in less supply of oil and therefore higher prices. Overnight US crude reached a high of 65.65 on the news that Iran has launched over a dozen ballistic missiles at two Iraqi bases containing US and coalition troops. No US casualties are reported yet, but some Iraqi casualties have been reported. Iran is threatening more 'crushing attacks' if the US retaliate. US President Trump tweeted, "all is well..." and did not announce immediate retaliation
The lesson from Saudi Arabia's drone attack from September 2019
The price of oil surged on the drone attack to Saudi's oil production facility as the country's production levels were cut in half. The same happened on attacks to crude carriers in the Persian Gulf in May and June.
However, in all these instances gains were short lived. Why? Because on a fundamental level the crude market is well supplied. This is a point recently made by JP Morgan on the current oil spikes and UBS will want to see some definite supply disruption in order to add to gains from here. OPEC Secretary Genreal Barkindo says he expects no oil supply disruption from Iraq and currently spare oil capacity is aprox 3-3.5mln bpd.The UAE minister stated that the oil market is well supplied now and that he is not forecasting a shortage of supply unless there is a catastrophic escalation in the region.
So what could drive oil prices higher?
So the general market consensus is that oil is unlikely to make higher further gains here without some kind of further catalyst. If the present situations remains as it is I am not expecting buyers to take the price above recent highs on either US crude or Brent crude. However, if US strike does actually come on those 52 Iranian targets then I would expect immediate oil bids on the news. Furthermore, an escalation in the conflict could lead to threats to supply from Iraq, Kuwait, and the UAE as well as Saudi Arabia. This is a total of 68% of OPEC's total production.
