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Oil Industry Braces for Mideast Turmoil After Soleimani Killing

James Herron, Grant Smith and Alex Longley

(Bloomberg) -- The U.S. assassination of one of Iran’s most powerful generals has the oil industry bracing for something it has long feared and anticipated -- direct military confrontation between the two adversaries.

In the hours after President Donald Trump ordered the killing at Baghdad airport of Qassem Soleimani, who led Iran’s Quds force, crude oil surged, American workers began to withdraw from Iraqi fields and traders scrambled to position themselves for even higher prices.

“We should all be bracing for a ferocious response,” said Helima Croft, chief commodities strategist at RBC Capital Markets. “The stage is set for a retaliatory spiral that could keep markets on edge well into 2020.”

QuickTake: How Qassem Soleimani Helped Shape the Modern Mideast

Rising tensions between the Iran and the U.S. have already caused unprecedented disruptions to oil markets, but so far they’ve been short-lived. Last year, Washington blamed Tehran for sabotage attacks on supertankers and a missile and drone attack on Saudi Arabia’s Abqaiq crude-processing plant in September -- the largest single supply halt in the industry’s history.

An escalation into direct fighting between U.S. and Iranian forces in the world’s most important oil-producing region would have longer lasting consequences for the global economy.

Severe Retaliation

Iran’s Foreign Minister Javad Zarif denounced the attack on Twitter as “an act of international terrorism.” The country’s Supreme Leader Ayatollah Ali Khamenei threatened “severe retaliation.”

The Iranian leadership is signaling that it will probably target U.S. military installations and bases in the Middle East and mobilize its network of militias across the region. One official told the state broadcaster that some 36 U.S. military bases and facilities are within reach of Iran’s defense forces, with the closest being in Bahrain.

The U.S. State Department issued a directive urging American citizens to leave Iraq immediately due to the threat.

Iraq is the second-largest producer in the Organization of Petroleum Exporting Countries, pumping 4.65 million barrels a day last month. It’s immediate neighbors in the region -- Saudi Arabia, Kuwait and Iran -- together produce about 15 million barrels a day. Most of their exports leave the Persian Gulf through the Strait of Hormuz, a narrow waterway that Iran has repeatedly threatened to shut down if there’s a war.

Emergency Meetings

Beyond the initial 4.8% surge in New York crude futures to an eight-month high, there were other signals in the market that people were preparing for further disruption.

Volatility rose to its highest level in a month and the cost of derivatives that insure against price spikes increased. Four million barrels of options contracts that would profit from a jump in Brent crude to $95 a barrel traded for both March and September.

Two commodity-trading houses called emergency meetings of senior staff on Friday to assess the new risks to the oil market, said people familiar with the matter.

Possible retaliation could include targeted strikes on oil facilities in the area, attacks on pipelines or oil flows through the Strait of Hormuz, Citigroup Inc. analysts including Ed Morse said in a report.

“We expect retaliation to be in the region, most likely in Iraq,” analysts at ESAI Energy LLC said in a report. “This could have significant impact on crude oil prices.”

Vulnerable Targets

Iraq’s oil fields are working normally, the country’s Oil Minister Thamir Ghadhban told Bloomberg by phone on Friday. Four U.S. citizens working at an Exxon Mobil Corp.-operated project have been asked to leave, he said.

“We are closely monitoring the situation in Iraq,” ExxonMobil said in an emailed statement. The company declined to comment on specific staffing levels, but said it has “programs and measures in place to provide security to protect its people, operations and facilities.”

Italy’s Eni SpA, which operates Iraq’s Zubair field, also said it’s monitoring the situation, while BP Plc and Royal Dutch Shell Plc declined to comment.

International companies have reason to be cautious as Iranian proxies have repeatedly proved their ability to strike targets within Iraq. The latest escalation in tensions came after a rocket attack on a military base late last month, which killed an American contractor and wounded several U.S. and Iraqi military personnel.

“The Soleimani hit moves us closer to a full-blown war scenario than Abqaiq,” Bobb McNally, a former energy adviser to President George W. Bush and president of the consulting firm Rapidan Energy Group, said on Twitter. Still, “both DC and Tehran want to avoid war and will try to contain brinkmanship,” he said.

--With assistance from Rakteem Katakey, Kevin Crowley and Javier Blas.

To contact the reporters on this story: James Herron in London at jherron9@bloomberg.net;Grant Smith in London at gsmith52@bloomberg.net;Alex Longley in London at alongley@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Fred Pals

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