Oil prices spike, Dow futures dive after U.S. airstrike kills Iran's top military leader
Crude oil prices spiked 4% Friday after Iran's top military commander was killed in an airstrike ordered by President Donald Trump, an abrupt escalation of Middle East tensions with serious implications for global oil supplies and economic growth.
Brent crude surged more than $2.50 a barrel, to $68.96, in its biggest jump since Saudi oil fields came under attack in September. West Texas Intermediate hit $63.72 a barrel, an eight-month high. Oil company stocks also climbed, with Shell up 1.4% and BP up 1.9% in Europe.
The news dampened Wall Street's euphoric start to 2020, with the Dow Jones industrial average falling more than 340 points at the opening bell. Gold, a safe haven for investors in tumultuous times, jumped 1.5% to $1,551 an ounce, a four-month high.
Sam Stovall, president of CFRA Research, said history suggests that the shock to the markets will be temporary as investors await the consequences from the airstrike.
"Equity and commodity markets have been roiled by a variety of unanticipated military actions over the past 30 years. Surprisingly, the effects have dissipated fairly quickly as investors concluded that they would not result in a global recession," Stovall wrote in a note to investors Friday. "Indeed the S&P 500 fell an average 1.6% on the day of the event, and was lower by an average 5.4% at the bottom. Yet the bottom was put in place an average of 17 calendar days after the event, and the S&P 500 recouped all that it lost an average of 45 days later."
About a fifth of the world's oil supply passes through the narrow Strait of Hormuz, off the southern coast of Iran. The strait is 21 miles wide at its narrowest spot, deemed "the world's most important choke point," by the U.S. Energy Information Administration. The quantity of oil ferried through the strait is double that of total U.S. oil production. If the route were shuttered because of threats of attacks, it would be a devastating blow to the global economy.
"While there is no immediate, direct impact on oil supply from Iran or any other country, events such as this have the effect of raising the geopolitical risk premium in oil prices," said Pavel Molchanov, an oil analyst with Raymond James. "We will need to watch how Iran responds, and whether its response might lead to an actual supply disruption."
Oil tankers and installations could be prime targets for a retaliatory attack, Jeffrey Halley, an Asia-Pacific analyst with OANDA, wrote in commentary Friday. Two oil tankers in the Persian Gulf were crippled by attacks in June, and drone strikes on state-owned Saudi Aramco in September temporarily took 5.7 million barrels of crude out of daily circulation, or 6% of worldwide consumption, and caused the biggest daily jump in oil prices since 1988. The U.S. blamed Iran for both attacks.
U.S.-Iran tensions have been building since 2018, when President Trump pulled out of the 2015 nuclear deal and reinstated sanctions aimed at strengthening the stranglehold on the country's oil exports. The sanctions have devastated Iran's economy, Iran's President Hassan Rouhani has said, costing the country $200 billion in revenues. Inflation is rampant at roughly 40%, and citizens are struggling with rising prices and food shortages.
Iran's Oil minister has accused the U.S. of imposing the sanctions to gain market clout as it enjoys a shale boom that has helped it become one of the world's top oil producers.
Maj. Gen. Qasem Soleimani, Iran's Quds force commander, was killed in an airstrike Thursday on a road near the Baghdad airport. Among the five who died in the convoy were Jamal Jaafar Ibrahimi, a powerful Iraqi militia leader better known as Abu Mahdi al-Muhandis, as well as Soleimani's son-in-law, according to a militia official in Iraq.
The attack comes a week after hundreds of pro-Iranian demonstrators stormed the U.S. Embassy in Baghdad, chanting "Death to America," barricading U.S. diplomats inside.
Defense Secretary Mark Esper said the Pentagon had taken "decisive defensive action" against Soleimani, the revered military figure who had close links to a network of armed groups backed by Iran across the Middle East and, according to the United States, bore responsibility for hundreds of American deaths.
Iran's defense minister, Amir Hatami, said that the strike by the "arrogant U.S." would be met with a "crushing" response. Foreign Minister Javad Zarif called the strike an "act of international terrorism" and said in a tweet the United States "bears responsibility for all consequences of its rogue adventurism."
