On Monday, the 30th, ESAI Energy wrote that conflict between the U.S. and Iran is a military as well as economic contest and that oil facilities in the region remain at risk. Last night's U.S. attack, killing the leader of the IRGC Quds Force, 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 U.S. cannot kill senior Iranian leaders without paying a significant price. At this moment, we expect retaliation to be in the region, most likely in Iraq. This could have significant impact on crude oil prices. 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.
Last night outside of the Baghdad airport, the U.S. attacked and killed the head of Iran's Revolutionary Guards Quds Force Qassim Soleimani and Abu Mahdi al-Muhandis, the deputy head of the Iranian-backed Popular Mobilization Forces in Iraq. Soleimani was one of the most powerful and influential figures in Iran's government. U.S. Secretary of Defense Mark Esper stated that the U.S. strike was “aimed at deterring future Iranian attack plans.” Secretary of State Mike Pompeo told foreign counterparts that “the U.S. remains committed to de-escalation.” Iran's Supreme Leader, Ayatollah Ali Khamenei, has vowed “severe revenge.”
The U.S. has framed its attack 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 U.S. cannot kill senior Iranian leaders without paying a significant price. Iran's overriding goals vis-à-vis Washington remain the same: to reduce U.S. influence in the Middle East and to get out from under sanctions. Layered on top of this now is the requirement to demonstrate to Washington and its own people that the Iranian government can defend itself. Defense, in this case, very likely means retaliation. Iran has a range of targets available: U.S. forces in the region, U.S. embassies and diplomatic personnel worldwide, U.S. citizens abroad, and U.S. partners and allies and their citizens and infrastructure. An attack may not be immediate; Iran has lost its lead planner and operational commander. But it will almost certainly occur.
In addition to any kinetic response or responses, Iran will want the Iraqi government to demand that remaining U.S. forces leave Iraq, and Tehran will use the incident to consolidate recently shaky domestic support within Iran. Escalation spirals are very possible. Despite Secretary Pompeo's words, Washington may feel compelled to respond to any future Iranian attack. In addition, U.S. and Iranian forces – operating in close proximity in the region – will be on very high alert and local commanders may take actions that spark a clash. Iranian allies, such as Lebanon's Hezbollah or militia forces in Iraq, may act on their own against U.S. targets. Finally, this attack will almost certainly have a significant impact on Iran's beliefs about the need for it to develop a nuclear weapons capability.
For the moment, we expect the next Iranian response to be in the region. The implications for the crude oil market revolve primarily around (1.) the possibility of further military action impacting oil operations in Iraq, including the country's 4.6 million b/d of crude oil production and almost 4.0 million b/d of crude oil exports. And (2.) the possibility of strikes on or near other oil facilities in the Arab Gulf that would inhibit exports by Iraq's neighbors such as Kuwait and Saudi Arabia.
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