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Oil surges after US kills top Iranian general, fuels war fears

London, United Kingdom | AFP | World oil prices soared more than four percent on Friday after the US killed a top Iranian general, fanning fresh fears of a conflict in the crude-rich Middle East, with Tehran warning of retaliation.

The head of Iran’s Quds Force, Qasem Soleimani, was hit in an attack on Baghdad’s international airport early Friday, according to Hashed al-Shaabi, a powerful Iraqi paramilitary force linked to Tehran.

Later, US President Donald Trump tweeted a picture of the American flag, and the Pentagon said he had ordered Soleimani’s killing.

In late morning London deals, Brent surged 4.5 percent to $69.23 per barrel and WTI jumped 4.1 percent to $63.71, as traders fretted over the dramatic escalation in tensions.

“They are afraid that Iran will retaliate to the killing of Soleimani,” Nordea Markets analyst Thina Margrethe Saltvedt told AFP, adding that Tehran could target “oil installations or transport infrastructure”.

Iran’s supreme leader Ayatollah Ali Khamenei has warned of “severe revenge” for “the criminals who bloodied their foul hands with his blood”, while the country’s foreign minister called the move a “dangerous escalation”.

– ‘Broader conflict’? –

Cailin Birch, global economist at The Economist Intelligence Unit, added that the market feared a “broader conflict”.

“The importance stems less from the potential loss of Iranian oil supplies … and more from the risk that this could spark a broader conflict that draws in Iraq, Saudi Arabia and others,” she told AFP.

“There is also a significant risk that Iran could launch a targeted attack on US ships in the region, which could disrupt seaborne crude oil flows and cause prices to rise further.”

Oil prices saw a record surge in September after attacks on two Saudi Arabian facilities briefly slashed output in the world’s top exporter by half.

Trump blamed Iran for the attack and previous other blasts on tankers in the Gulf last year.

“The market remembers very well the unexpected drone attack on Saudi Aramco last autumn and is afraid that something similar can have a massive impact on the oil market supply and prices for an extensive period of time,” noted Saltvedt.

Birch, however, talked down the prospect of a full-blown war and described Friday’s price gains as “fairly muted” so far.

“We do not expect to see a one-day price spike, in percentage terms, as large as the 10-percent jump seen in September 2019 when Saudi oil infrastructure was attacked.

“While this strike is the most significant escalation of US-Iran tensions that we’ve seen yet, we still do not expect the US and Iran to enter into a full-fledged war that would impact oil production and disrupt regional supply chains.”

– ‘Extremely high’ tensions –

The killing of Soleimani is nevertheless a dramatic escalation of tensions between the United States and Iran and comes after a pro-Iran mob this week laid siege to the US embassy in Iraq following deadly American air strikes on the hardline Hashed faction.

The attack on the embassy highlighted new strains in the US-Iraqi relationship, which officials from both countries have described to AFP as the “coldest” in years.

“The assault on the US embassy in Iraq was most likely the event that sparked this strike,” added Birch.

“Although we still think that an outright war between the US and Iran is unlikely, this killing takes the possibility of US-Iran talks off the table entirely for 2020 — and will probably set off a chain of violent but strictly targeted strikes that will keep regional tensions extremely high.”

The drama sent investors rushing for the hills and safe-haven units rallied with the yen up 0.4 percent against the dollar and gold touching a near four-month peak at $1,550.43 per ounce.

Global equity markets were also rattled, with Frankfurt, London and Paris losing ground after a largely downbeat session in Asia.

– Key figures around 1110 GMT –

West Texas Intermediate: UP 4.1 percent at $63.71 per barrel

Brent Crude: UP 4.5 percent at $69.23 per barrel

London – FTSE 100: DOWN 0.4 percent at 7,571.26 points

Paris – CAC 40: DOWN 0.5 percent at 6,012.39

Frankfurt – DAX 30: DOWN 1.7 percent at 13,163.64

EURO STOXX 50: DOWN 1.0 percent at 3,756.85

Hong Kong – Hang Seng: DOWN 0.3 percent at 28,451.50 (close)

Shanghai – Composite: DOWN 0.1 percent at 3,083.79 (close)

Tokyo – Nikkei 225: Closed for a public holiday

New York – Dow: UP 1.2 percent at 28,868.80 (close)

Pound/dollar: DOWN at $1.3075 from $1.3145 at 2200 GMT

Euro/pound: UP at 85.20 pence from 84.99 pence

Euro/dollar: DOWN at $1.1139 from $1.1172

Dollar/yen: DOWN at 108.10 from 108.57 yen

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