Oil prices gained steadily through December before the assassination of leading Iranian general Qasem Soleimani in Baghdad on January 3 took Ice Brent futures to $69.50/bl for the first time since attacks on Saudi oil infrastructure in September.

Prices at the pump reacted to the gains on international markets for both diesel and petrol after steadily coming down since September. There still seemed to be plenty of scope for further price hikes, particularly for petrol. Strikes at French refineries have cut European gasoline supplies and the fuel is trading at an unusually high $5.5/bl premium to crude oil. This time last year, the margin was flat.

Prices were initially driven higher by deeper production cuts than expected from Opec and other key producers announced at their December meeting, and improved trade relations between the US and China. But geopolitical factors look likely to take over from fundamentals as prime price drivers in the near term.

How and where Iran retaliates to the US military action will be key and disruption to shipping in the vitally strategic Straits of Hormuz could send prices much higher. Flows have fallen through the strait as US sanctions have choked off Iranian oil exports, and other Mideast Gulf producers have cut output to meet their Opec commitments. But nearly 15mn b/d of crude still transits the strait overlooked by Iranian forces on its way out of the Mideast Gulf.

The killing of Soleimani threatens a different scale of conflict, and the potential for a bigger oil price rally. The US retreated from retaliating when Iran shot down one of its drones in June last year. But the death of a US contractor in a missile attack in Iraq on December 27 triggered a US reprisal on Iranian-backed militias two days later. Just what Washington might do should Iran launch attacks on US military or diplomatic personnel in Iraq, Bahrain or elsewhere in the region would be of a different order.

Another full-scale war in the Middle East seems unthinkable, but Iran will react. Disrupting oil flows and production could form part of the Islamic Republic’s response. Oil markets could be in for a wild ride.