Soleimani killing raises fears of reprisals on oil infrastructure

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Oil prices jumped on Friday after a U.S. military air strike killed a top Iranian general in Iraq, raising fears over a possible disruption to global supplies if Tehran retaliates.

The drone strike on General Qassem Soleimani, who was head of Iran’s Quds Force, an elite intelligence unit of the Islamic Revolutionary Guard, and the country’s chief military strategist, is the culmination of months of tension between Iran and the United States.

“It’s a very big moment for Iran in particular, and for the Middle East more broadly, and it introduces a ton of uncertainty into the world, “ said Ian Nieboer, managing director with RS Energy Group in Calgary. ”Iranian intent to seek revenge should be taken seriously.”

While the immediate impact on global crude supply was negligible, the longer-term fallout could be more damaging. Iran is one of the key infrastructure linchpins in the energy market. About one-fifth of global crude supplies, much of it originating from Saudi Arabia and Iraq, is shipped through Iran’s territorial waters via the Strait of Hormuz.

One of the biggest fears is a disruption of crude shipments by Iran through the Strait – a strategic chokepoint.

There are also worries of the possibility of Iranian attacks on Saudi oil infrastructure.

In September, the U.S. blamed Iran for a missile and drone attack on the operations of Saudi Aramco, the giant Saudi state energy company.

"While there is clearly a very wide range of possible geopolitical outcomes over the coming days, weeks and likely months, we think it is fair to say that the geopolitical risk premium reflected in Brent prices now needs to be factored into the region on a more sustained basis, Menno Hulshof, analyst with TD Securities, wrote in a note to clients on Friday.

“A looming Iranian response to the attack could represent a second market-moving event for near-term crude prices.”

Brent crude rose by about 3.6 per cent, hitting a four-month high of around US$68.61 a barrel.

West Texas crude increased by 2.9 per cent to US$62.98 a barrel, the highest level since last spring.

Iraq’s oil ministry said in a statement on Friday that both its oil production and exports haven’t been affected, but analysts are worried that will change.

“Revenge will come, maybe not overnight but it will come," Olivier Jakob, managing director with Petromatrix, wrote in a note on Friday.

U.S. President Donald Trump said on Friday he ordered the killing of the Iranian general to prevent a war.

“Soleimani was plotting imminent and sinister attacks on American diplomats and military personnel but we caught him in the act and terminated him,” Mr. Trump told reporters at his Florida resort. “We took action last night to stop a war. We did not take action to start a war,” Mr. Trump said, adding that the United States does not seek a regime change in Iran.

In Tehran, the killing of Mr. Soleimani provoked outrage.

Iran’s Supreme Leader Ayatollah Ali Khamenei vowed to seek revenge against the “criminals” who carried out the attack.

On Friday, the U.S. embassy in Baghdad advised that all U.S. citizens in Iraq leave the country immediately due to the heightened security risk.

The possibility of a supply crunch in the Middle East could provide a boost to the depressed Canadian energy industry.

TD’s Mr. Hulshof said the instability in the Middle East highlights Canada’s “relative stability” as a supplier of oil to global markets.

Among the biggest gainers on the Toronto Stock Exchange on Friday were energy stocks, including Canadian Natural Resources and Encana Corp.

Western Canadian Select crude closed at US$40.03 a barrel on Friday, according to data from NE2 Group.

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