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Oil steadies as Middle East tensions subside

By Amanda Cooper

Brent crude steadied above $65 after a whip-saw week of trading, after red-hot tension between the US and Iran appeared to subside

The Brent crude oil price steadied, holding around its highest in four and a half months, after tensions appeared to subside between the United States and Iran, and an initial trade deal with China looked set to go ahead.

Brent crude futures were last at $65.58 a barrel, up 0.2 per cent on the day, in afternoon trading in London. The price shot up by as much as 4.8 per cent this week, to its highest since last September, after a drone strike by US government killed a prominent Iranian general in Iraq, with Iran responding by firing missiles at a US base in the country.

By Thursday, the US wrote a letter to the United Nations in which it said it was "ready to engage without preconditions in serious negotiations" with Iran following the countries' exchange of hostilities, according to the BBC.

This, in turn, helped take some heat out of the oil market, bringing the price back below $70 a barrel following Wednesday’s spike.

In the letter, the US said the killing of Iranian General Qasem Soleimani, seen by many as an architect of Iranian policy in the Middle East, was an act of self-defence. Iran, for its part, also wrote to the UN Security Council, justifying its attack on a US base, but said it was not seeking “escalation or war”.

Washington and Tehran have long had an uneasy relationship with one another. But tensions ratcheted up in May 2018, when US President Donald Trump unilaterally withdrew from an international nuclear deal with Iran, on the grounds that Tehran was not complying with the terms of the agreement.

Since then, the US has slapped sanctions on Iran, reducing its oil exports to virtually nothing and crushing its economy.

The oil market has adapted to the drop-off in Iranian crude exports, which have fallen below 500,000 barrels per day (bpd), based on figures from S&P Global Platts, from closer to 2 million bpd prior to the US leaving the nuclear pact.

The risk for the oil market from an escalation in the conflict is not further disruption to Iran’s crude supply, but rather from disruption to shipping via the Strait of Hormuz.

Around 20 per cent of total daily oil supply passes through the straight, which links the Persian Gulf with the Arabian Sea. Saudi Arabia, Iraq and Iran all send their tankers through the strait to international buyers.

Elsewhere, China said Vice Premier Liu He, who has acted as President Xi Jinping’s lead trade negotiator, would travel to Washington to sign the “phase one” trade deal with the United States next week, according to Bloomberg.

The United States and China have been locked in a dispute over trade for nearly two years, with each having imposed billions of dollars’ worth of tariffs on each other’s imports. In December, the two sides announced they had reached an agreement on trade, under which Washington would roll back some duties and Beijing would commit to purchasing billions of dollars in US goods and services. Other details, as yet, remain unclear, but the tentative deal was enough to lift the oil price and send stock markets to record-high closes in 2019.

Bloomberg said Liu would travel to the US from Jan 13 to 15.

FURTHER READING: China’s vice premier to sign trade deal in Washington

FURTHER READING: Oil prices surge after Iran fires missiles at US bases in Iraq

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