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US-Iran tensions take their toll on oil, gas markets

The effects of tensions between the U.S. and Iran have reached shale oil and gas producers as prices and stocks react to the fast-paced developments that began with the killing of a top Iranian military commander Jan. 2.

The mounting tensions have reintroduced a recently absent supply-side risk premium to the oil market, analysts said. Height Securities LLC analysts wrote Jan. 3 that they viewed the killing of Qassem Soleimani, a general who headed the Islamic Revolutionary Guard Corps' elite Quds Force, "not as another one-off military action that will fade from the news cycle, but as a significant event in the U.S.-Iranian relationship that will alter the Middle East substantially. … The impact for investors should trend toward increasing risk premiums for oil and greater overhanging risk in broader markets."

At the moment, Iraq finds itself in the middle of the tit-for-tat between the U.S. and Iran as the tensions between those two countries have manifested on its soil. Meanwhile, there is rising confusion about the continued U.S. presence in Iraq.

"Although any U.S. withdrawal — if it occurs — would likely be gradual, [its] potential … has cast further uncertainty on the region," Fitch Solutions analysts wrote Jan. 8. "The oil market appears attuned to these threats and we see the ebb and flow of geopolitical risks in the Middle East fueling sporadic premia in Brent over Q1."

Amid the uncertainty, Raymond James analysts wrote "there is no way to quantify the probability" that Iran would move to disrupt oil production in Saudi Arabia or other U.S.-allied states in the region, "suffice it to say that our baseline oil price forecast … does not assume any incremental supply disruptions."

On the stock market side, recent gains in U.S. oil producer stock values suggest threats to Middle East oil production and transport could provide ongoing upside support for U.S. oil producers as demand for U.S. oil could climb.

Share prices for some of the biggest U.S. producers have been on the rise since the start of 2020, following West Texas Intermediate crude oil prices higher in the wake of the U.S. airstrike that killed Soleimani in Iraq then again following a retaliatory attack by Iran on a U.S. base in Iraq on Jan. 7.

WTI crude oil surged to a $65.65 per barrel high in overnight trade on Jan. 7 but fell to $59.61/bbl at the Jan. 8 close on the New York Mercantile Exchange, as President Donald Trump emphasized de-escalating tensions with Iran.

Before conciliatory messages were exchanged Jan. 8, the S&P Oil and Gas Exploration and Production index, which represents a larger basket of U.S. oil and gas production stocks, was up 3% for the year.

Producer stock values could see sustained improvement should demand for U.S. oil rise with a more significant conflict between Iran and the U.S. as attacks on oil facilities or any disruption to the Strait of Hormuz could heighten global demand for U.S. crude oil. But should the latest moves by the U.S. and Iran lead to an end to the Iranian conflict, and U.S. sanctions are lifted, U.S. producers will face increased competition and stock prices could suffer, PRICE Futures Group analyst Phil Flynn said.

As tensions begin to ease, however, Appalachia's shale gas producers are bracing for another beating in the stock market as the new year gets off to a rough start. Negative news for current and future gas prices, coupled with a broader market retreat from oil and gas as tensions with Iran eased, hurt America's pure-play gas producers concentrated in Appalachia, analysts said.

"Gas price [is] certainly impactful, but [I] think it's more of a fund flow impact following the Trump/Iran news today which has taken down oil -5% causing weakness across the spectrum," Tudor Pickering Holt & Co. shale oil and gas analyst Sameer Panjwani said in an email after Jan. 8's market close.

Tudor Pickering Holt and others are gloomy about the prospects of significant increases in commodity gas prices in 2020. "We continue to expect prices to weaken further in Q1'20 towards $2/Mcf, absent a weather event," the energy investment bank told its clients Jan. 3. "Investors will be looking for further cuts to capital plans and growth to be announced during upcoming conference calls. Both economics and cash flow do not support drilling at current levels."