U.S. Markets

Oil closes little changed despite Iran fears, giving up earlier gains

Thousands of Iranians hold banners and posters as they take part in a pro-government rally in Mashhad, Iran on January 4, 2018.
Nima Najafzadeh/Anadolu Agency/Getty Images

Oil prices edged higher to settle in the green on Monday, after a volatile session that saw prices spike 2% in early trading, before dipping into negative territory, and then finally settling little changed. The price action came despite ongoing fears that Iran will retaliate against U.S. interests.

U.S. West Texas Intermediate gained 22 cents, or 0.3%, to settle at $63.27 per barrel. Earlier, WTI rose to $64.72, its highest level since April. International benchmark Brent crude gained 31 cents to settle at $68.91 per barrel, after briefly dipping into negative territory. Earlier in the session it hit a more than three-month high of $70.74.

"The calculus over whether or what Iran will do is a dicey one," Again Capital's John Kilduff said to CNBC Monday. "With Iran sitting on its hands, for now, some of the anxiety is coming out of the price. The complacency may be misplaced, however ... There is a significant deployment of U.S troops to the region underway," he added.

Following Thursday's death of top Iranian commander Qasem Soleimani, Iran vowed to retaliate, which Wall Street analysts said would determine the direction of oil's next move.

For instance, if the nation targets production in Saudi Arabia or Iraq — OPEC's two largest producers — prices could move higher.

Not that long ago a geopolitical event of this nature would have likely triggered a larger spike in oil prices, which is indication that oil has become a "lagging indicator," RBC head of commodity research Helima Croft said Monday.

She added that there are likely "a lot of market participants who are waiting to see if there is an actual physical supply disruption," that there is a "segment of the market that probably believes that this will blow over."

On Sunday an Iranian state-run television broadcast said that the nation would no longer respect uranium enrichment restrictions set forth in 2015's nuclear deal, in an escalation of tensions.

On Friday Brent gained 3.55%, with WTI gaining 3.06%, and both posted their fifth straight week of gains.

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Oil prices jump after US airstrike killed Iran top commander—Four experts on how it affects energy

Citi global head of commodity research Ed Morse said Friday that Brent prices will top $70 in short order, while Again Capital's John Kilduff said that if Iraq production takes a hit "oil prices will spike higher."

Iraq is OPEC's second largest oil producer, pumping around 4.6 million barrels per day in December. On Sunday the Iraqi parliament passed a resolution calling for an expulsion of foreign troops, which raises question about the future of the allied mission that has successfully fought the "Islamic State," or ISIS, in recent years.

Friday's spike in oil prices reminded some on the Street of the September drone attacks targeting Saudi Arabia's oil facilities in Abqaiq and Khurais, which took an estimated 5.7 million barrels of oil offline. While oil initially spiked 15% and climbed higher, prices ultimately drifted back down and a few weeks later were back at pre-attack levels after Saudi Aramco quickly restored production.

But some are saying that this time around prices could stay elevated for longer, given tight supply and a historically weak part of the year for oil.

On Friday Eurasia Group raised its 2020 high-end base case oil target to $75 per barrel, based on "rising risk to oil infrastructure in the region." If conflict breaks out, which the firm's Middle East and North Africa head of research Ayham Kamel places at 30% likelihood, prices could climb as high as $95.

Citi said that other possible retaliations could be "attacks on pipeline oil flows or shipping through either the Strait of Hormuz or the Red Sea," through which more than a fifth of the world's oil supply flows.

Thursday's airstrike comes following an especially strong fourth quarter for oil, which saw OPEC+ announce deeper-than-expected production cuts in December, and as easing trade tensions led to upbeat outlooks for demand.

WTI gained 10.68% in December — its best month since January 2019 — and 12.93% for the quarter. It's 34.46% gain for the year was its best since 2016. Brent gained 5.7% in December and 8.59% for the quarter. It also had its best year since 2016, gaining 22.68%.

Carter Braxton Worth from Cornerstone Macro said WTI looks set to reach $72 per barrel, and that investors should "embrace" the pop. "It will be right to play energy stocks on the long side in the weeks/months again," he said in a note to clients Sunday.

That said, analysts at Morgan Stanley said that "any further escalation could keep oil prices supported in the short term," but that any gains could be short lived. The firm said it sees Brent closer to $60 rather than $70 for the year given "an oversupplied oil market in 2020 as a whole."

- CNBC's Michael Bloom, Amanda Macias and Spencer Kimball contributed to this report.