Oil prices went up by 2% on Monday in the midst of growing tensions in the Middle East, following U.S. President Donald Trump’s threats of attacking 52 Iranian targets if Tehran were to retaliate.
For the first time since May 2019, Brent crude exceeded the $70 threshold; reaching $70.75 during the London trading.
In the meantime, U.S. WTI increased by 1.17% to $63.79 per barrel at the start of the day, after standing $64.72, its highest since April.
The oil market has been on an upward trend since Friday, following a U.S. airstrike in Baghdad. This operation resulted in the assassination of Iranian commander Qassem Soleimani; which has sparked conflict in the Middle East and could possibly impact the region’s oil supply.
Oil and the market’s reactions
In the past hours, Trump made several threats to Iran and Iraq, which has impacted crude and gold prices.
These Media Posts will serve as notification to the United States Congress that should Iran strike any U.S. person or target, the United States will quickly & fully strike back, & perhaps in a disproportionate manner. Such legal notice is not required, but is given nevertheless!
— Donald J. Trump (@realDonaldTrump) 5 de enero de 2020
The region accounts for nearly half of the world’s crude production and a fifth of global crude shipments pass through the Strait of Hormuz.
It also warned Iraq it would impose severe sanctions if it moved to expel U.S. troops; as ordered by the Iraqi parliament in retaliation after the attack against the commander of the Quds Special Forces.
Iraq is the second-largest producer in the Organization of Petroleum Producing Countries (OPEC).
Uncertainty and geopolitics
“Geopolitical tensions are at their highest level in this century. And this turbulence is escalating,” the UN Secretary General warned on Monday, with regards to the situation sparked by the assassination of General Qasem Soleimani, head of the Quds Force, by U.S. drones.
“This cauldron of tensions is leading more and more countries to take unpredicted decisions with unpredictable consequences and a profound risk of miscalculation.”
“We are living in dangerous times. Geopolitical tensions are at their highest level this century. And this turbulence is escalating. Even nuclear non-proliferation can no longer be taken for granted.”
The New Year has begun with our world in turmoil.
My message is clear:
Exercise maximum restraint.
Renew international cooperation.
Let us not forget the terrible human suffering caused by war. It is our common duty to avoid it. pic.twitter.com/iB1pOu8fia
— António Guterres (@antonioguterres) 6 de enero de 2020
“The situation generates a lot of uncertainty and many speculative reactions on the geopolitical scene. Although it is unlikely that there will be a closure of the Strait of Hormuz, the deterioration in Iraq carries risks for supplies,” Norbert Rucker, Head of Economics at Julius Baer was quoted by Reuters as saying.
Suncorp Analyst Peter Dragicevich told Bloomberg that the U.S.-Iran conflict will be a key factor that will affect the markets in the near future.
The current instability stems from the uncertainty surrounding Iran’s response to the death of Soleimani, Energy Aspects specialist Amrita Sen told CNBC.
She added that a delayed response could contribute to lower prices.
Gold prices soar
The price of gold soared to its highest in over six years. The value of this precious metal increased by 2.3% to $1,588.12 per troy ounce (toz).
Thus, it continues on the rise and has grown by 7.8% since late 2019.
The ingot is usually seen as an alternative for investment in times of political and financial uncertainty, Goldman Sachs indicated.
“Spikes in geopolitical tensions historically lead to higher gold prices when they are severe enough to cause currency debasement,” the bank said.
It also added that “The range of potential scenarios is very large, spanning oil supply shocks or even oil demand destruction—which would be negative to oil prices.”
Furthermore, it states history shows that under most outcomes gold will likely rally to well beyond current levels.
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