ENERGY markets are on tenterhooks as the overall picture gets murkier. Geopolitics is back in the saddle.

Amid fears of Iranian retaliation against US drone attacks, that killed its top General and strategist Qassem Soleimani, oil markets surged. It went up by around four per cent, with Brent approaching $70 a barrel, in the immediate aftermath.

With the US offensive continuing, analysts are of the view that Iran cannot stay silent and will have to respond. With the Iranian Supreme Leader declaring Iran would avenge the killing of Soleimani, concerns are growing. Crude markets seem in for a rough ride. “Revenge will come, maybe not overnight, but it will come and until then we need to increase the geopolitical risk premium,” Olivier Jakob, head of consultancy Petromatrix, said in a note to investors.

Consequent to the developments, market volatility rose to its highest level in a month and the cost of derivatives that insure against price spikes increased.

It seems oil markets would need to brace for this volatility for some time to come.

In past too, when geo-political tension flared in the oil rich Middle East, Iran had threatened to put in jeopardy crude shipments from the Gulf to the world. About 20pc of crude traded worldwide goes via the Strait of Hormuz.

That possibility remains intact. The shipping lane across the Hormuz is only three kilometres wide and Iran has the capacity to disrupt shipments through the straits.

Crude tankers have come under attack, probably from Tehran, in recent past too. Iran can utilise this capacity to achieve political objectives – yet at a significant price.

Would Iran commit this hara-kiri is open to debate.

But meanwhile this means oil prices “will likely hold” around $70 a barrel, “but could make a run at $80 if the conflict spreads to the oil fields of southern Iraq or if Iranian harassment of commercial shipping intensifies,” risk consultancy Eurasia Group said in a research note published on Friday.

“We should all be bracing for a ferocious response,” Helima Croft, chief commodities strategist at RBC Capital Markets was quoted as saying. “The stage is set for a retaliatory spiral that could keep markets on edge well into 2020.”

“We expect retaliation to be in the region, most likely in Iraq,” analysts at ESAI Energy LLC said in a report. “This could have significant impact on crude oil prices.”

“But it does appear to be a pretty serious escalation that has occurred and for that reason I think the market is going to be on tenterhooks for a good while just yet,” James Athey of Aberdeen Standard Investments, told CNBC’s “Capital Connection” on Friday.

Some however, continue to be sceptic. “I doubt this is the start of a severe spike in the oil price,” Robert Horrocks of Matthews Asia told CNBC’s Capital Connection on Friday.

There seems some logic behind this view.

While Friday’s crude price increase was significant, it was still short of the 14pc surge seen on September 16, when the world’s largest oil processing facility in Saudi Arabia was hit by missiles and drones. The strike briefly took out about half of the supplies from the world’s largest oil exporter.

In comparison, the reaction of the markets to Friday’s events remained ‘somewhat’ subdued. And thus despite spikes here and there, some don’t see the long term crude view as rosy.

In the longer term, the rise in crude oil prices could be limited by the fact that the energy market is flush with oil while demand has softened.

Geopolitical developments have generated ripples. None can deny. Yet, for how long, is the question under the hammer at the moment. Pundits remain unsure of the long term effects of the ongoing, geopolitical, melodrama. And they have a case in point. The mid-September attacks on critical Saudi infrastructure sent oil prices up. Yet so soft were the market fundamentals that the premium remained in effect just for one day. 24 hours later, it was almost business as usual, with oil markets getting back to normal.

Today is no different.

Geopolitics will continue to swing the markets, one way or the other. But the impact would, most probably, be short term. Chris Weafer of Macro Advisory feels three critical factors need to be monitored. These include, but indeed not limited to, are global oil demand growth, non-Opec output growth, and the extent of output control. The Organisation of Petroleum Exporting Countries and their allies – specifically Russia – could exhibit in the given circumstances. The slope remains slippery, today too.

‘Crude market forecasting’ is professionally hazardous. Yet, one feels tempted to stress; with weak fundamentals, long term crude prognosis continues to stay in the dim zone.

Published in Dawn, January 5th, 2020