The drone attack that killed three US servicemen in northern Jordan, blamed by the White House on Iranian-backed militants, marks a major escalation of tensions in the Middle East and appears likely to provoke a backlash as financial markets open and commodities this week. .
Oil prices are likely to rise when futures trading begins Sunday evening, analysts said.
Much will ultimately depend on the U.S. response and whether Iran takes action to close the Strait of Hormuz, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch on Sunday afternoon.
“We are at the cusp of this escalation, which could have a serious impact on the flow of crude oil,” he said.
Three US service members were killed and more than two dozen injured in a drone strike on an American base in northeast Jordan, according to US Central Command. These were the first American casualties in months of attacks on American bases by Iran-backed militias since the war between Israel and Hamas began in October.
President Joe Biden blamed Sunday’s attack on an Iranian-backed militia group and said the United States “will hold all those responsible accountable at a time and in a manner (at) our choosing.” According to some reports, US officials were still working to definitively identify the precise group responsible for the attack, but assessed that one of several Iranian-backed groups was to blame.
Some congressional Republicans have called for direct retaliation against Iran.
“We must respond to these repeated attacks by Iran and its proxies by directly targeting Iranian targets and its leadership. The Biden administration’s responses so far have only invited further attacks. It is time to act quickly and decisively for the whole world to see,” wrote Senator Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, in a post about X.
Oil futures rallied last week, but the gains were attributed in part to U.S. production disruptions and more optimistic expectations for economic growth.
Oil prices have seen short-lived rallies linked to developments in the Middle East since the start of the war between Israel and Hamas, but have failed to create a lasting geopolitical risk premium. West Texas Intermediate crude oil
CL00,
CL.1,
the U.S. benchmark, remains about $15 below its 2023 peak in the mid-90s, set in late September. Brent crude oil BRN00,
the global benchmark, returned above $80 a barrel last week.
Attacks by Iran-backed Houthi militants on Red Sea shipping have forced a shift of oil tankers and merchant ships. For crude, this had implications for the physical market, but did not stop the flow of crude from the Middle East.
An Iranian move to close the Strait of Hormuz, the world’s biggest oil shipping chokepoint, remains a major concern.
The strait is a narrow waterway connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just two miles, separated by a two-mile buffer zone.
Energy Information Administration
According to the US Energy Information Administration, in the first half of 2023, about 21 million barrels per day of crude oil passed through waterways, equivalent to about a fifth of daily global consumption.
The US stock market has largely looked past tensions in the Middle East, with the S&P 500 SPX returning to record territory this month, while the Dow Jones Industrial Average DJIA also set a series of records.
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Away from oil, markets will be monitored for any knee-jerk rallies in assets and instruments that traditionally serve as safe havens during periods of heightened geopolitical tension, including US Treasuries BX:TMUBMUSD10Y,
the US dollar DXY and gold GC00,
—Contributed by the Associated Press.