US Enters the War
Coming into the weekend, President Trump announced that he was going to take two weeks to review and decide on his next move regarding the Israeli-Iranian War. Most commentators assumed that he was implementing this pause to give diplomacy one last opportunity.
Yesterday, United States bombers struck Iran’s nuclear facilities. Specifically, seven B-2 bombers stationed in the United States flew and linked up with approximately 125 other aircraft from the region and bombed Iran’s key nuclear sites located at Isfahan, Natanz, and Fordow.
In total, the B-2 bombers dropped 14 GBU-57s Massive Ordinance Penetrators (also known as bunker busters) on two sites. In addition to the attack, 75 precision-guided missiles were launched, as well as Tomahawk missiles.
Battle Damage Assessment
According to President Trump, who spoke from the White House late Saturday evening, the attack was a total success and the Iranian sites were “completely and totally obliterated.” The follow-up assessment conducted early Sunday morning by the Defense Department was also optimistic, but slightly more cautious.
In the coming days, as more signal intelligence and satellite imagery becomes available, we will have a much better assessment of the situation.
For the Isfahan and Natanz sites, which are largely above ground, there can be little doubt that the damage is extensive, and these sites are no longer operational.
However, for the Fordow site, which is buried deep, approximately 250 to 300 feet underground, the situation is less certain. Last night was the first time the US has used its Bunker Buster bombs, and there is a question concerning the level of reinforcement of the Fordow facility. Nonetheless, there can be little doubt that it suffered a significant level of damage.
What Comes Next
As part of his address at the White House, President Trump stated that “this cannot continue, there will be peace or there will be a tragedy for Iran.” In short, the President implied that if Iran halted its military activities and gave up its nuclear enrichment programme, the US would view this matter as completed and there would be no further attacks.
The question on everyone’s mind is how Iran will respond.
It would be foolhardy to assume that Iran did not anticipate the US actions. Not the exact timing, but the actions themselves. Already, Iran has stated that it has moved its 60% enriched uranium to a different location, meaning the strikes destroyed Iran’s nuclear programme infrastructure but did not end Iran’s ability to manufacture a weapon in the future.
In our view, it is unlikely that Iran will simply acquiesce. If it did so, it would endanger the current regime and forego an important part of its sovereignty as a nation.
However, as a result of Israel’s military success against Hamas, Hizballah, and the Assad regime, Iran has lost much of its proxy network. It is more isolated than in the past. It still has the Houthis, who will most likely restart attacks on shipping in the Red Sea and Bab el-Mandeb, but not much else.
We expect that Iran will respond by continuing its missile attacks against Israel, to show its people that it is still in the fight. There is a chance that it will expand its attacks to the US regional bases; however, Iran’s leadership understands that this would escalate the conflict with the United States.
Finally, Iran could take steps to close the Straits of Hormuz. This could take the form of a naval blockade, or more likely, the laying of mines or an obstruction by the sinking of a vessel in the narrow shipping channels. This response would hurt Iran’s neighbors and the global economy. The overall impact on global energy prices would depend heavily on the extent and duration of the impact on traffic traversing the Strait.
Based on the latest reports, tankers are hastily moving to exit the Persian Gulf in anticipation of an impending closure.
The events from this weekend are expected to increase the global price of energy when markets reopen this week. Crude oil prices closed in the mid-70s on Friday, and we would expect them to open 10 to 15 percent higher in Monday’s early trading, placing them between $80 and $90 per barrel. We are also expecting the price of natural gas to increase as LNG shipments are threatened. The greatest impact will likely be felt in Europe and Asia.
In the event the Straits of Hormuz are closed, one of the worst-case scenarios from an energy perspective, we would expect prices to trade in the range of $100 to $125 per barrel. Moreover, we would expect corresponding increases in the price of natural gas. Again, the duration of any price spike will depend primarily on the cause of the Strait’s closure, its potential duration, and any damage to the region’s energy infrastructure.
