Fears of escalation in the Middle East following a U.S. attack in Iraq early Friday, which killed a high ranking Iranian military leader, could support a sustained move higher for crude oil prices, which jumped 4% on Friday.

The U.S. airstrike killed Iranian Quds Force Commander Qasem Soleimani, along with Abu Mahdi al-Muhandis, the deputy head of the Iran-backed Iraqi Popular Mobilization Forces (PMF) and other Iranian military leaders. It follows attacks on Dec. 31 at the U.S. embassy in Baghdad, which the United States accused Iran of orchestrating.

The death of Soleimani stoked market concerns around further disruption of global crude supplies in the region following the Abqaiq attacks last September. About 5.7 million b/d of production was taken offline following the attacks on the Abqaiq processing facility and Khurais oilfield in eastern Saudi Arabia.

However, unlike the short-term spike in oil prices following those attacks, the latest event is likely to add a security-risk premium to oil prices for the foreseeable future, according to analytics firm GlobalData.

Brent crude oil futures surged Friday to nearly $70/bb. West Texas Intermediate (WTI) crude oil futures rose $1.87 day/day to $63.05/bbl.

“While there is no immediate impact on oil supply, events such as this naturally have the effect of raising the geopolitical risk premium in oil prices,” Raymond James & Associates Inc. analysts said.

Despite Friday’s rally, Evercore ISI noted that demand is only growing by 1 million b/d, and there is at least 3 million b/d of spare capacity available in the world today, though much of that is in Saudi Arabia.

In addition, if Brent were to price around $65-70/bbl in 2020, which remains Evercore’s view, there would “almost surely” be increased investment in the United States. Investment still would be lower than in years past given that capital discipline has become the default corporate strategy across the U.S. energy sector.

However, ESAI Energy LLC said statements that the oil market has tremendous spare capacity and can easily weather a new disruption are glib and misleading. “An extended period of conflict in the region will support prices by fueling uncertainty, even as alternative suppliers step up.”

The firm noted that the U.S. attack was described as pre-emptive self-defense designed to deter future Iranian or Iranian-supported attacks. “Iran will see its response in similar terms: a need to demonstrate to Washington that the United States cannot kill senior Iranian leaders without paying a significant price.”

Iran has a range of targets available, including U.S. forces in the region, partners and allies, their citizens and infrastructure.

News outlets reported that the Iraqi oil ministry said Friday “a number” of Americans working in southern Iraq were leaving the country after the United States urged its citizens to depart immediately because of heightened tension in Iraq and the region.

Other foreign workers were not departing and oilfields across the country were operating normally, the Iraqi ministry said.

Soleimani’s killing “increases fears of war in the region and of major disruption to regional oil supplies through military or cyber-attacks against oil facilities,” GlobalData Editorial Director Richard Thompson said. The attack “is a major escalation” in the conflict between the United States and Iran and “adds considerable new uncertainty to an already unstable region.”

Four oil vessels were attacked last May near the Strait of Hormuz, which transports about 21 million b/d of global crude flows and is considered by the U.S. Energy Information Administration to be “the world’s most important oil chokepoint.” ESAI expects retaliation for Friday’s attacks to be in the region, most likely in Iraq. “This could have significant impact on crude oil prices.”

Raymond James analysts said while it seems certain that Iran will retaliate, the key question is how it would do so. Given that it is “uncharted territory,” it is impossible to predict the nature of Iranian retaliation.

“Limited tit-for-tat retaliation using proxies would be at the low end of what Iran could do,” Raymond James analysts said. “Direct Iranian military action against U.S. allies such as Saudi Arabia, or even U.S. forces in the region, would mark a stronger level of response.”

From an economic perspective, an Iranian blockade of the Strait of Hormuz would be the most dramatic option, with massive read-through for the oil market, but this would also be a case of "cutting off one's nose to spite one's face," given the damage this would cause to Iran's own economy.

Nevertheless, the proverbial ball, at this moment, is in Iran's court. Although this event has not directly impacted oil supply, the Raymond James team is carefully monitoring whether a physical supply disruption might materialize, “and if so, to what extent.

“...the trajectory of how the crisis evolves will largely hinge on Iran's next move. Short of blockading the Strait of Hormuz, Iran might seek to reprise attacks on oil industry targets in Saudi Arabia and/or other U.S.-allied Gulf states,” Raymond James analysts said. “While there is no way to quantify the probability of any such event, suffice it to say that our baseline oil price forecast for 2020 -- $65 WTI/$70 Brent -- does not assume any incremental supply disruptions.”

Stock prices for major oil companies operating in the Middle East were mixed Friday following the attack. BP plc, which two years ago started natural gas production from the first phase of the Khazzan field in Oman, saw its stock price close Friday at $38.83/share, up 69 cents day/day. The stock price for Royal Dutch Shell plc, with its extensive portfolio of chemicals manufacturing, storage, logistics and trading operations in the Middle East, jumped 44 cents to $60.21/share.

However, super-major ExxonMobil Corp., which discovered a huge natural gas reservoir offshore Cyprus nearly a year ago and recently secured exploration acreage offshore Egypt, saw its stock price slip 58 cents to $70.32/share.