Energy markets lift on US assassination of Iranian general

Financial market news was fairly light on last week as many people remained on holiday and headlines were dominated by harrowing tales out of Australia’s bushfire ravaged regions along with escalating US-Iran tensions.

While trading volumes were low, the first two trading days of 2020 saw the ASX get off to a good start as China announced a new round of economic stimulus. This helped ease the pain after sharp falls on New Year’s Eve that led to the local market ending the week down 1.3%.

Much of the ASX selloff on the 31st was due to the building tensions between the US and Iran, which escalated to a US drone strike near Baghdad’s airport that targeted and killed top Iranian military commander, Qassem Soleimani.

The strike was approved by US president Donald Trump, say the US Department of Defence, in response to previous attacks orchestrated by Soleimani on American citizens across the Middle East.

But, as described by Democrat Joe Biden, Trump in effect has “tossed a stick of dynamite into a tinderbox,” in a move that could leave the US “on the brink of a major conflict across the Middle East.”

The response out of Iran suggests that the words of the democratic presidential candidate may be no exaggeration.

Iran’s Supreme Leader, Ayatollah Ali Khamenei, warned that a “harsh retaliation is waiting” for the US, while defense minister, Amir Hatami, confirmed that the strike by the “arrogant US” would be met with a “crushing” response.

Tensions between the two nations are now coming to a head, having been building since 2018 when Trump pulled out of the 2015 nuclear deal and reinstated sanctions that have since devastated Iran’s economy.

But one corner of the market that is benefitting from the escalating conflict is energy, as concerns rise around possible disruptions to the oil supply.

Brent crude jumped by more than 4%, hitting US$69.50 a barrel at one point on Friday. The spike can be attributed to heightened geopolitical risk being priced into oil, even though there has been no immediate, or direct, impact on oil supply from Iran or elsewhere.

That being said, the way in which Iran responds could lead to an actual supply disruption.

A direct attack is a real possibility, keeping in mind that the US blame Iran for attacks on oil tankers last year and for a September rocket attack on Saudi Arabia's oil industry that damaged key oil facilities and temporarily cut the Kingdom’s production by half.

RBC Capital Markets predict that American oil companies operating in Iraq could find themselves "caught in the crossfire" from any further escalation in the conflict — increasing the potential for supply disruptions and higher crude and petrol prices.

Locally, ASX energy stocks as a whole, gained 1.7% on Friday, while Oil Search (ASX: OSH) gained more than 3.2%, Woodside Petroleum (ASX:WPL) gained 0.9% and Santos (ASX:STO) was up 2.3% for the day.

At the smaller end of the energy market, 88E Energy (ASX:88E) had a strong week finishing up around 20% and has now more than doubled in price since its October lows. The higher oil price has helped, as has news that upcoming drilling of the company’s Charlie-1 appraisal well at Project Icewine, on the Central North Slope, Alaska, is on track. 88 Energy announced last week that an ice road construction is about to get underway and the February-scheduled spud is proceeding as planned.

Speaking of the Alaskan North slope, this is a region that increasingly looks to be coming back into favour and could be an area of interest for energy investors in 2020.

In December, the US Bureau of Land Management’s Alaska State Office held its most successful annual lease sale since 2006, receiving US$11.2 million in bids for more than one million acres – a significant lift in interest from the prior year’s bids of just US$1.5 million.

ASX-listed Alaska North Slope junior, XCD Energy (ASX: XCD) picked up four leases in the sale, while US oil major ConocoPhillips (NYSE: COP) and regional exploration pioneer Bill Armstrong’s North Slope Exploration LLC also gained significant tracts. Operators on the North Slope, such as these — along with the wider energy sector — are certainly worth keeping tabs on going forward.