DTN Oil

WASHINGTON (DTN) -- After advancing more than 3% in the prior session, oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied again early morning Thursday after Iran vowed to retaliate for the terrorist attack that killed over 80 people near Iranian General Qasem Soleimani's tomb, directly blaming Israel for the escalating violence in the region.

A confluence of geopolitical risks sent oil prices higher for the second straight session Thursday, including a potential for a wider Middle East conflict and a prolonged supply disruption at Libya's largest oil field -- El Sharara -- after anti-government protests halted operations across the Murzuq Basin. As of Thursday morning, Libya's protests shut down the 300,000-barrels-per-day (bpd) El Sharara and 70,000-bpd El Feel oil fields in response to high fuel prices and lack of economic opportunity in southern Libya. It is unclear when operations can resume. Both oil fields have been frequently targeted by protesters and rival militias since the downfall of Moammar Qadhafi in 2011.

In the Middle East, oil traders continue to monitor escalating tensions between Iran and Israel after Tehran blamed the government of Benjamin Netanyahu for the twin explosions that killed over 80 people participating in a memorial service for the Iranian General Qasem Soleimani. Soleimani was killed in a U.S. drone attack in 2020 and was considered the most powerful figure in the Islamic Republic after the regime's supreme leader, Ayatollah Ali Khamenei.

The attack stands to further destabilize the volatile region that has been rocked by the Hamas-Israeli war, attacks by the Houthi militia on commercial vessels in the Red Sea, and violence in Iraq, Syria, and this week, in Beirut, Lebanon.

On Tuesday, Iran dispatched a warship into the Red Sea, emboldening Houthi militias that ambushed at least 24 commercial ships since October following the start of the Hamas-Israel war. In response to the escalating violence, some of the world's largest shipping firms have refused to transit through the Suez Canal, complicating trade flows between Europe and Asia and forcing some vessels to take the more costly and time-consuming route around the Cape of Good Hope.

Robert McNally, president and founder of Rapidan Energy Group, estimates there is an at least 30% chance of material supply disruption in the Middle East as a result of the ongoing tensions. "While Tehran doesn't want the war, President Biden doesn't want the war -- no one is willing to de-escalate either. Everyone is escalating here over the holidays. The market is too complacent. I think there must be at least $12 of geopolitical risk premium," said McNally to Blomberg TV on Tuesday.

Lending further support for the oil complex, The American Petroleum Institute reported late Wednesday commercial crude oil stocks tumbled by a larger-than-expected 7.418 million barrels (bbl), more than twice the expected 2.7-million-bbl drop. Inventories at the Cushing, Oklahoma, tank farm, the New York Mercantile Exchange delivery point for West Texas futures, increased 765,000 bbl. The report further showed gasoline stocks surged 6.913 million bbl as of Dec. 29, far above calls for stocks to increase 400,000 bbl. Distillate stocks jumped 6.686 million bbl versus an expected gain of 400,000 bbl.

Near 7:30 a.m. EST, ICE March Brent futures advanced $0.73 to $78.98 bbl, and NYMEX February West Texas Intermediate futures rallied to $73.56 bbl, up $0.86 in overnight trading. NYMEX February ULSD futures gained $0.0222 to $2.6259 gallon, while NYMEX February RBOB futures added $0.0073 to $2.1654 gallon.

Liubov Georges can be reached at Liubov.Georges@dtn.com