Oil drops as supply remains unaffected amid US-Iran tensions

Markets await possible Iranian retaliation following Suleimani's burial today

A funeral procession for General Suleimani in Iran. The general who also fought in the Iran-Iraq War received a multi-city commemoration. Office of the Iranian Supreme Leader via AP

Oil dropped on Tuesday after rallying to an eight-month high on Monday as supplies have so far remained uninterrupted, despite escalating US-Iran tensions.

Brent, the benchmark for more than half of the world's oil, fell 1.1 per cent to $68.14 per barrel at 5.05pm UAE time, while West Texas Intermediate was down 1 per cent lower at $62.63 per barrel.

Oil had topped $70 per barrel after rallying by more than 4 per cent at the start of trading on Monday because Iran vowed "tough revenge" over the killing of its top military commander in Baghdad. Brent eventually settled at $68.91 per barrel on Monday.

The fluctuation in oil prices was due to a risk "re-assessment", JBC Energy said in a note on Tuesday.

"Given the extent of the rally over the last few weeks this is nothing unusual and does not negate the fact that even aside from the geopolitical factors, we are in a fundamentally strong market environment," it said.

Meanwhile, Goldmans Sachs said gold, which surged to seven-year highs following the assassination of Qassem Suleimani, was a safer hedge amid tensions than oil.

The recent rally in commodities once again indicates "supply disruptions", said Ole Hansen, commodity strategy head at Saxo Bank.

"These developments signal a worrying escalation in the Middle East with the markets now awaiting the response from Iran," he said.

Suleimani, head of the elite Quds Force within the Islamic Revolutionary Guard Corps, was among the top policymakers in Tehran, overseeing proxy military conflicts in the region, notably in Syria and Iraq. His funeral, which has lasted three days, was set to conclude on Tuesday but was postponed after a stampede led to 50 deaths, according to the Fars news agency.

Iran's Supreme Leader Ayatollah Ali Khamenei has vowed "severe revenge" against US interests. Iranian Foreign Minister Javad Zarif wrote on Twitter the "end of malign US presence in West Asia" had begun on Monday.

The Islamic republic is hosting delegates from Oman, Qatar, India, Afghanistan and Pakistan to discuss regional security escalation in Tehran on Tuesday, Mr Zarif added.

President Hassan Rouhani responded on Twitter to US President Donald Trump's threat to bomb 52 significant sites in Iran, including cultural sites, by saying Iran was prepared to target 290 sites.

Mr Trump had suggested the number 52 as a reference to the number of hostages held by Iran between 1979 and 1981, while Mr Rouhani's figure referred to the casualties from the downing of an Iranian passenger aircraft by a US vessel in the Gulf in 1988.

Amid uncertainty over whether the US will pull its troops out of Iraq, upon Baghdad's insistence, Tehran has categorised all American armed forces as terrorist.

Mr Trump also threatened Iraq with sanctions on Sunday if the country ordered a withdrawal of US troops.