US-Iran conflict escalates, crude oil prices soar
US benchmark oil prices soared to an 8-month high after a US airstrike in Iraq killed Qassem Suleimani, one of Iran's top military commanders, raising concerns that escalating tensions in the Middle East could disrupt crude oil flows.
Following the news, West Texas Intermediate (WTI) futures for delivery in February on the New York Mercantile Exchange rose by $2.16 to close at $ 63.34/bbl. Brent crude futures for March delivery rose $2.65, or 4%, to $68.90/bbl.
“Last night’s US attack, killing the leader of the IRGC Quds Force, was described as pre-preemptive 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 US 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,” ESAI Energy commented in a press release.
Outside of the Baghdad airport, the US 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.
US Secretary of Defense Mark Esper stated that the US strike was “aimed at deterring future Iranian attack plans.” Secretary of State Mike Pompeo told foreign counterparts that “the US remains committed to de-escalation.” Iran’s Supreme Leader, Ayatollah Ali Khamenei, has vowed “severe revenge.”
“Iran’s overriding goals vis-à-vis Washington remain the same: to reduce US 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: US forces in the region, US embassies and diplomatic personnel worldwide, US citizens abroad, and US 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,” ESAI Energy said.
ESAI added: “In addition to any kinetic response or responses, Iran will want the Iraqi government to demand that remaining US 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, US 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 US 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 now, ESAI Energy expect the next Iranian response to be in the region. The implications for the crude oil market revolve primarily around 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 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.
