Oil heads into unchartered territory as markets price in higher risk premium

Energy installations and critical infrastructure remain vulnerable and have been earlier targets of Iranian attacks

A number of drones and missiles hit Saudi Aramco’s Abqaiq facilities on September 14, which Washington said was carried out by Tehran. Reuters

Oil is headed into unchartered territory as risk premium returns to the markets, which are awaiting an Iranian response to Friday's assassination of the country's top military commander by the United States.

The death of Qassem Suleimani, the head of the foreign arm of the Islamic Revolutionary Guard Corps early morning in a US drone strike near Baghdad airport caused Brent to surge by more than 4 per cent. Prices rallied close to the three-month highs seen just after the September 14 attacks on Saudi Aramco's facilities, which temporarily halted 5 per cent of global supply. Washington said Tehran had masterminded the attack.

Following Suleimani's assassination, the Iranian regime is calibrating its response with the country's Supreme Leader Ayatollah Ali Khamenei attending the country's national security meeting for the first time.

"They are making plans on how to respond and it is certain that there will be a response from Iran," said Iman Nasseri, managing director, Middle East at London-based Facts Global Energy.

"Depending on how they do that and what is the size of the response and where that happens, it could have further implications on the oil markets and oil prices," he added.

Ayatollah Khamenei who announced a replacement to Suleimani vowed "severe revenge" against the US in a tweet on Friday.

Oil installations and critical infrastructure remain vulnerable and have been earlier targets of Iranian cyber attacks. Iranian hackers attempted to cause an explosion at a Saudi petrochemicals facility in August 2017.

Tehran, which Washington has accused of being behind a spate of attacks on tankers transiting the Strait of Hormuz through the summer of 2019 could target US bases in Iraq, Kuwait, Saudi Arabia or US army personnel stationed in Iraq, Lebanon and Syria, observed Mr Nasseri.

"It depends on the scale of response. We may see prices approach $70 and the fallback down to where it was, which is $65 and that's what the market considers the price of oil at current fundamentals with geopolitical risk in the Middle East included," he added.

Iran is also likely to risk leaving the Joint Comprehensive Plan of Action, signed by the P5+1 world powers in 2016, and could possibly consider enriching uranium to 20 per cent, which could speed up the process for Tehran to develop weapons-grade fuel.

"The Middle East is a powder keg, too much oil - one-third of global oil supply - comes out of the region and no one knows if and how Iran will respond," said Giovanni Staunovo, commodity analyst at UBS.

"How long the risk premium on oil will last will however depend if the latest tension will impact oil flows or not," he added.