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Oil markets weigh Soleimani strike as Trump hits Iran

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Oil markets weigh Soleimani strike as Trump hits Iran

The killing of Major General Qassim Soleimani, Iran’s top hardline military leader, has put oil prices and the fragile stability of the Middle East once again on tenterhooks.

Crude jumped 4.9% to almost $69.50/b on Friday after a US drone strike in Baghdad killed Soleimani on foreign soil. Oil traders are now weighing the scale and ferocity of Tehran’s inevitable response.

Higher prices reflect the fear that Iran will lash out immediately at the oil facilities of its enemies in the region, or hit tanker traffic in the Strait of Hormuz. However, a broader direct military confrontation between the US and Tehran in the Middle East would have an even bigger impact on energy trade flows in a region that produces a fifth of the world’s oil.

“Iran will have to retaliate in some form or another,” said Anoush Ehteshami, professor of international relations at Durham University and a regional expert. “Soleimani was no ordinary figure, and the charisma he carried in the region cannot be underestimated. I would expect a wave of reaction across the Middle East, but I don’t think they will target oil.”

As head of the elite Quds brigade of the Iranian Revolutionary Guard Corp, Soleimani was seen as the biggest single threat to US foreign policy interests in the region.

An architect of Tehran’s military strategy to extend its influence in Iraq, Syria, Yemen and the Lebanon, he rose to prominence during the Iran -Iraq war in the early 80s. A close ally of Iran’s Supreme Leader Ali Khamenei, his death “leaves the regime in a precarious position and only reinforces the ‘martyrdom’ narrative,” Ehteshami said.

Pushed into a corner, Iran may seek to directly confront the US militarily, or more likely stoke anti-American sentiment amongst its Shiite Muslim allies.

Go deeper: Podcast - Soleimani has been killed, how will Iran respond?

“The risk of major escalation has moved into new territory, but we still put the odds of a broader US -Iran conflict below 50/50,” according to S&P Global Platts Analytics. Of course, any disruptions from conflict would be covered by OPEC, which has over 2 million b/d of spare capacity.

Middle East tensions rise

Tensions and security are already high around oil, which has become a target over the last 12 months in the Persian Gulf and its key shipping lanes.

Iran and the militia it supports were blamed for attacks on Saudi Arabia’s giant Abqaiq and Khurais oil plants last September and a series of unproven strikes earlier in the year on tankers anchored near the mouth of the Persian Gulf or in the Red Sea. Abqaiq, the worst of the attacks, shut in 5.7 million b/d of production and forced the world’s largest exporter to draw on its emergency reserves.

Soleimani Iran oil price timeline

Click to enlarge

Security has since been stepped up at oilfields across the Gulf, but the attacks have demonstrated how vulnerable these facilities remain.

US diplomatic efforts to muster an international force to help protect the Strait of Hormuz from Iranian threats has received a tepid response. Despite these fears, seasoned energy industry veterans in the region are skeptical of a further escalation hitting the Middle East’s flows of crude.

“It won’t affect oil supply from the region, but the real impact will be psychological,” said Abdullah bin Hamad al -Attiyah, former OPEC president and previously Qatar’s longest serving energy minister, in a phone interview from Doha. “It will bring the speculators back to the oil market."

A risky strategy

Eliminating one of America’s most ardent enemies within the Iranian regime by drone strike is a risky strategy for US President Donald Trump to take. A war with Iran could be ruinous for his re-election hopes in 2020 if higher oil prices push the cost of gasoline well above $3/gal.

However, oil market fundamentals appear to be in Trump’s favor. S&P Global Platts Analytics expects more oil supplies to come on stream this year in Brazil, Norway and Canada, adding to stockpiles.

Of more immediate concern will be the threat to American nationals and US oil companies operating across the Middle East, which could now be targeted directly by Tehran, or its proxies in revenge attacks.

Exxon Mobil, the largest US international oil company and operator of the giant West Qurna field in southern Iraq, said it was “closely monitoring the situation” in the wake of Soleimani’s death.

The US government told its citizens to leave Iraq immediately.

“The problem now in the Middle East is the spread of small wars everywhere,” said Al -Attiyah, who now heads the Abdullah bin Hamad Al -Attiyah International Foundation for Energy & Sustainable Development. “You can see it in Sudan, in Yemen, Libya, in Syria and Iraq.”

However, Trump’s advisors may hope Soleimani’s death adds to the pressure building on the Iranian regime to eventually negotiate a new nuclear deal with the US on Washington’s own terms and rein in its regional meddling especially in Iraq.

Sanctions have already reduced the country’s oil production to its lowest level in 30 years. The loss of oil income has crippled the economy, triggering street riots late last year after the government was forced to increase subsidized fuel prices. Its currency has halved in value and GDP fell by more than 9% last year.

“Soleimani was essential for Khamenei’s regional policies,” said Ehteshami. With him killed outside Baghdad airport, Trump can claim a victory, but volatile oil markets will continue to reflect an increasingly unstable and nervous Middle East throughout 2020.

This article appeared as a column in The Telegraph