Oil Slips & USD Flat as Mideast Tensions Seem to Ease

Alan Penny

7 January 2020

3 min read

USD and oil trading

  • Iranian military commander’s death sparked concerns over oil supply disruption
  • Fears over Iran’s retaliation for US drone strike subside
  • Safe-haven currencies slide over easing concerns

Oil prices and safe-haven currencies lost some of their gains as tensions in the Middle East seemed to ease. However, investors still appear cautious as the US dollar traded almost flat.

The US dollar index traded at 96.36, while Brent crude LCOc1 dropped by 0.9% to trade at $68.28 per barrel.

The US dollar index traded at 96.36, while Brent crude LCOc1 dropped by 0.9% to trade at $68.28 per barrel. US West Texas Intermediate crude CLc1 dropped to $62.72 per barrel. The Japanese yen and Swiss franc dropped from their new highs to trade at ¥108.33 and $0.9696 respectively.

Oil formed new high after US drone strike

On January 3, US President Donald Trump ordered a drone strike that killed Major-General Qassem Soleimani at Baghdad Airport. In response, Ayatollah Ali Khamenei swore to avenge Soleimani’s death.

Soleimani was one of Iran’s most powerful figures, second only to Supreme Leader Ayatollah Ali Khamenei. He was responsible for much of Iran’s expanding military influence in the region.

President Trump stated that Soleimani had plans to end American lives, citing this as the reason for the attack.

The situation between the United States and Iran has grown increasingly tense over the past year. The US once again brought sanctions against Iran. Missile and drone attacks on Saudi company Aramco’s oil installations prompted the decision.

Soleimani’s death increased tensions between the two countries. According to Reuters, the US embassy in Baghdad urged Americans to leave Iraq right away.

The markets still seem uncertain regarding what the geopolitical fallout might be. However, investors were concerned over potential oil supply disruptions. This led to oil hitting a three-month high.

Markets re-evaluate risks in Middle East

Today, oil lost some of its gains as markets reconsidered the risks of supply disruptions. Many feel it is unlikely Iran will disrupt supply, at least not right away.

Consultancy Eurasia Group maintains Iran will likely focus its attention on US military targets instead of oil. The group expects that Iran will continue harassing regional energy infrastructure and commercial shipping, but it doesn’t believe that these activities will be severe.

Carsten Menke, a Julius Baer analyst, sees the Iranian government as being “quite rational and strategic.” To this end, he doesn’t believe they will disrupt the flow of oil. It would only alienate some of Iran’s allies in the region, like India and China. Therefore, Menke feels Iran is highly unlikely to attempt to close the Strait of Hormuz.

It should be noted that, on Monday, Defense Secretary Mark Esper stated that the US has no intention of withdrawing from Iraq. This is on the back of reports of a letter from the US military, apparently informing Iraqi officials that troops were being repositioned as they prepared to leave.

The Japanese yen and Swiss franc created three- and four-month highs respectively as concerns escalated. However, Tuesday saw the two currencies decline as concerns eased. Markets seemed to calm as there has been no more bad news from the region.

US dollar trading almost flat

Despite markets seeming a little less concerned over the situation, the US dollar index was trading almost flat against a basket of other currencies.

However, this could also be prompted in part by Monday’s economic data. It showed the US manufacturing sector has shrunk more than it has done in over ten years. Order volumes tanked to form an 11-year low, while factory employment figures declined for the fifth consecutive month.

Written By
Alan Penny

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