How will the US – Iran tension escalation impact oil prices?

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The killing of Iran’s most revered military leader could be more impactful for the oil market than other recent incidents that have just temporarily spiked crude prices.

Iranian General Soleimani, who headed the Iran Revolutionary Guard’s Quds Force and built Iran’s terror network across the Middle East, was killed by the U.S. in an airstrike at the Baghdad International Airport in Iraq.

Oil futures Friday afternoon were about 3% higher with West Texas Intermediate oil futures at about $63 per barrel, off its early high just above $64. International Brent crude futureswere up 3.6% at about $68.67 per barrel.

While oil backed off the day’s highs, oil analysts expect the price to remain volatile and slightly elevated with the potential to move much higher, if there are further actions.

“I think we’re in unchartered waters,” said Helima Croft, head of RBC global commodities strategy. “This is not a run-of-the-mill general being assassinated. This is where it becomes really challenging for the market. I don’t think this is a one off. You may have a reprisal. It may be quiet for a period, then there could be another incident.”

“Global oil markets will be volatile for weeks to come,” said Greg Valliere, chief U.S. policy strategist at AGF Investments, in a note. “There’s a reason, finally, for caution in the stock market.” “Eventually there will be an uneasy truce … But that’s a long, long way off; this will get worse before it gets better,” he added.

Energy stocks such as Concho Resources and Apache went up 3.7% and 1.3%, respectively. Devon Energy climbed 1.2%.

A weaker-than-expected reading on the manufacturing economy also weighed on stocks. December’s ISM manufacturing index came in at 47.2, the weakest in a decade and smaller than the 49 reading expected by economists polled by Dow Jones.

In addition to Mideast tensions, investors parsed a survey showing the contraction in the American manufacturing sector worsened last month. The materials sector was the worst performer in the S&P 500. Stocks also were down in Asia and Europe, with Germany’s Dax leading declines with a 1.3 per cent fall.

“Geopolitical risks are still alive and kicking,” said Elwin de Groot, head of macro strategy at Rabobank. “Over the past few years these risks have undoubtedly affected markets, but hardly with any lasting impact. Yet geopolitics remains important, if only because it could always turn into a more nasty factor for markets at some point.” Assets seen as shelters during times of strife pushed higher. Gold climbed by 1.3 per cent to $1,549 an ounce, a near four-month high.

Government bonds rallied, pushing the yield on 10-year US Treasuries down by 9.2 basis points to 1.7898 per cent. Similar price gains were seen in UK, Germany and other key European government bonds. The Japanese yen — also considered a barometer of investors’ levels of fear — moved higher. The currency pushed the dollar down by 0.4 per cent to ¥108.11 — the yen’s strongest point since late October.

Based on reports on Financial Times CNBC / MSN / 

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