UPDATE 8-Oil prices jump after U.S. air strike kills top Iranian commander

Devika Krishna Kumar

* U.S. air strike kills Iranian general in Iraq

* Iran's supreme leader vows revenge

* U.S. crude stockpiles drop sharply-EIA (Adds trade volumes, comments, spread moves, updates prices)

NEW YORK, Jan 3 (Reuters) - Oil prices jumped to the highest level in more than three months on Friday after the U.S. killed a top Iranian military commander in Iraq, sparking fears that escalating conflict in the region could disrupt global oil supplies.

An air strike at Baghdad airport killed Major-General Qassem Soleimani, architect of Iran's spreading military influence in the Middle East, with Iran's Supreme Leader Ayatollah Ali Khamenei vowing revenge.

Brent crude was up 3% or $1.96 a barrel by 12:37 a.m. ET (1737 GMT) at $68.21, just off the session peak of $69.50 a barrel, highest since the mid-September attack on Saudi oil facilities.

West Texas Intermediate (WTI) crude was up $1.52 or 2.5% at $62.70 a barrel. The session high was $64.09 a barrel, its highest since April 2019.

U.S. Secretary of State Mike Pompeo said Soleimani was planning attacks on U.S. facilities and workers in Iraq, Lebanon, Syria and other countries.

Tensions between the United States and Iran have flared over the past year as Washington reimposed sanctions on Tehran and in the aftermath of a missile and drone attack on oil installations of the Saudi Aramco company that U.S. officials blamed Iran for.

The Soleimani attack has brought those tensions back to the forefront, fanning worries about a squeeze on crude supplies, though the effect of the increased geopolitical risk remains unclear.

"The market is trying to assess whether we'll see a supply disruption, if any," said Andy Lipow, president of consultants Lipow Oil Associates.

"Iran has already seen their exports cut to minimal volumes; they have little to lose in the way of crude oil exports."

More than 675,000 front-month WTI contracts changed hands, the most in a month, while Brent trading volumes surpassed 364,000 lots, highest since the Saudi attacks.

Concern shifted to potential retaliation, and U.S. oil companies were taking steps to evacuate workers from Iraq.

"The Iranian retaliation could take the form of a quick response by proxies against U.S. allies and assets. One-off incidents targeting Gulf oil flows are possible, as are attacks on Gulf oil infrastructure, after the Abqaiq incident did not trigger a U.S. military response, said Paul Sheldon, chief geopolitical risk analyst at S&P Global Platts.

The U.S. embassy in Baghdad on Friday urged all citizens to depart Iraq immediately, and dozens of U.S. citizens working for foreign oil companies in the Iraqi oil city of Basra were preparing to leave, company sources told Reuters.

All oil fields across the country were operating normally and production and exports were not affected, Iraq's Oil Ministry said in a statement. It said no other nationalities were departing.

The oil futures market is already beginning to price in near-term supply tightness. The spread between the December 2020 and 2021 U.S. crude futures contracts <CLZ0-Z1> as well as the corresponding spread for Brent <LCOZ0-Z1>, popular trades in oil markets, surged to the highest level since October 2018.

"If the situation worsened, and oil supplies were disrupted, this could have broader economic and financial market impacts through a sharp rise in crude oil prices," UBS Global Wealth Management's chief investment officer Mark Haefele said in a note.

"However, spare capacity in oil remains adequate (OPEC's and Russia's spare capacity is around 3.3 mbpd). And, we still expect an oversupplied oil market in 2020."

Oil prices also found support after data showed weekly U.S. crude stockpiles fell by the most since June. (Reporting by Devika Krishna Kumar in New York, Bozorgmehr Sharafedin in London, additional reporting by Florence Tan and Seng Li Peng in Singapore; Editing by David Gregorio and Alistair Bell)