Oil settles more than 3% higher after U.S. airstrike kills Iranian military commander - MarketWatch

Oil futures rallied Friday, lifting U.S. prices to their highest finish in more than seven months, after a U.S. airstrike in Iraq killed one of Iran’s top military commanders, sparking fears of an escalation of tensions in the Middle East that could disrupt the flow of crude.

“Of concern is that Iran has been pushed so much in the corner by President [Donald] Trump, that it has nothing to lose, and therefore may weigh extraordinary steps in response,” said Manish Raj, chief financial officer at Velandera Energy.

Still, Friday’s relatively “modest WTI price jump reflects [the] market’s base case assumption that the conflict will continue, but without any disruption to oil production or distribution,” he told MarketWatch. “If there is an actual disruption in production...then WTI price would jump to the 70’s and Brent to the 80’s.”

West Texas Intermediate crude for February delivery CLG20, -0.02%  on the New York Mercantile Exchange rose $1.87, or 3.1%, to settle at $63.05 a barrel, paring some of their earlier gains after trading as high as $64.09. The settlement was the highest for a front-month contract since May 20, according to Dow Jones Market Data. For the week, prices added roughly 2.2%.

Need to Know: Why oil could hit $80 even without a ‘full-blown’ U.S.-Iran war

The global benchmark, March Brent crude BRNH20, +0.15%  rose $2.35, or about 3.6%, to $68.60 a barrel on ICE Europe after trading as high as $69.50 a barrel. The settlement and intraday levels were the highest since the aftermath of a September attack on Saudi oil infrastructure widely blamed on Iran. For the week, Brent oil rose 2.6%.

“If this were five years ago, oil would absolutely be above $100,” Helima Croft, head of global commodity strategy at RBC Capital Markets, in an CNBC interview Friday.

However, U.S. production has “blunted the impact in the market of geopolitics,” she told CNBC. “The question is how does the Iranian leadership respond,” as in the past, they have demonstrated a capacity to be very disruptive. “We do need to pay attention to what comes next.”

Read: Why the oil market rally on elevated U.S.-Iran tensions may be short lived

A U.S. airstrike at Baghdad’s airport killed Qassem Soleimani, leader of the foreign wing of Iran’s Islamic Revolutionary Guard Corps. The Pentagon said President Donald Trump ordered the strike in a defensive action, alleging that Soleimani had planned to direct attacks on U.S. diplomats and service members in the region. Iran’s supreme leader, Ayatollah Ali Khamenei, declared three days of mourning for Solemaini’s death and said that a “hard revenge awaits criminals.”

Read: Who was Qassem Soleimani, and why is his death a major development in U.S.-Middle East relations?

Also see: Here’s a look at the biggest movers among U.S. oil stocks after Iran’s Soleimani is killed

The airstrike, which news reports said also killed top Iraqi paramilitary commander Abu Mahdi al-Mohandes, is likely to spark a response from Iran.

“We believe that an Iranian retaliation is almost certain,” said Paul Sheldon, chief geopolitical risk analyst at S&P Global Platts, in emailed commentary. “The chances of a broader conflict remain below 50%, although risks are entering new territory. The initial market reaction indicates Brent is capped at $70/Bbl, without another major incident.”

Read: Strait of Hormuz, the world’s biggest oil chokepoint, in focus as U.S.-Iran tensions flare

For now, the challenge for the oil market in “assessing these potential...energy crises is simply the havoc they wreak on investor expectations,” said Ryan Gianotto, director of research at ETF-issuer GraniteShares. “While U.S. equities pared early morning losses, crude actually re-accelerated its gains as the session approached settlement—diverging takes on the magnitude of risk.”

Meanwhile, data from the Energy Information Administration released Friday revealed that U.S. crude supplies fell by 11.5 million barrels for the week ended Dec. 27. Analysts polled by S&P Global Platts had forecast a decrease of 3.1 million barrels, and the American Petroleum Institute late Tuesday reported a 7.8 million-barrel tumble, according to sources. The EIA data were delayed from their usual Wednesday release due to the New Year’s Day holiday.

“Even though the EIA reported the largest weekly decline in crude supplies since June, substantially all of the decline was due to reduction in net crude imports,” said Velandera Energy’s Raj.

The EIA data also showed weekly supply increases of 3.2 million barrels for gasoline and 8.8 million barrels for distillates. The S&P Global Platts survey called for gasoline stocks to increase by 3.7 million and distillate stocks to add 3.2 million barrels.

Also see: Baker Hughes data show U.S. oil-rig count down a second week in a row

On Nymex, February gasoline RBG20, +0.11%  rose 2.6% to $1.7488 a gallon, while February heating oil HOG20, -0.09%  added 1.8% to $2.0614 a gallon. Both posted modest gains for the week.

February natural-gas futures NGG20, -0.75%  tacked on 0.4% to $2.13 per million British thermal units, paring its weekly loss to 4.5%. The EIA on Friday separately reported that domestic supplies of natural gas fell by 58 billion cubic feet for the week ended Dec. 27. They were expected to fall by 67 billion cubic feet, according to a survey of analysts by S&P Global Platts.

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