Posted: Jan. 03rd 2020
US Kills Iranian Major General Soleimani
United States President Donald Trump ordered the targeted killing of Iran’s Major General Qassem Soleimani, the leader of Iran’s Islamic Revolutionary Guard Corps. The United States military carried out the order yesterday evening via a drone attack at the Baghdad International Airport, killing Soleimani and several others.
As expected, Iran’s Supreme Leader Ayatollah Khamenei vowed revenge for the death of Soleimani. While the United States claimed that the actions taken were due to Soleimani’s involvement in orchestrating attacks on coalition bases and personnel in Iraq over the past weeks.
There can be little doubt that the events transpiring over the past 24 hours have significantly increased tensions in an already unstable region. The financial markets reacted to the news with equities and bond yields dropping and precious metals and oil surging.
Due to the fear of retaliation, the United States embassy in Iraq instructed US citizens to depart Iraq immediately. The timing and extent of Iran’s eventual response is the question that requires detailed consideration. Initially, Iran will most likely use this event to galvanize its citizens who have been suffering severe economic hardship due to heightened economic sanctions put in place by the Trump administration. Subsequently, Iran will probably look for a high-value target to attack. To execute such an attack will take time and planning and, therefore most likely will not be immediate – particularly since the United States and its allies are prepared for such a response.
As one would expect, the heightening of tensions in the Middle East has spiked the price of crude – both WTI and Brent jumped approximately four percent overnight. While such a knee-jerk reaction is to be expected, it is important to consider that the markets are currently over-supplied. Moreover, this attack could result in a fracturing of the OPEC+ group – Iraq and Russia, both close allies of Iran may use this as an opportunity to open their taps and leave Saudi Arabia holding the bag on production cuts.
The oil markets appear to be anticipating an event where Iran retaliates against the region’s crude oil production or shipping infrastructure – similar to the attacks in Saudi Arabia or tankers in the Gulf. Such an attack is possible and would temporarily impact supply (the duration and severity of which would depend on the type of event). This type of retaliation would be strictly economic in nature (the typical response to the imposition of sanctions). In our view, the targeting and killing of Soleimani takes the confrontation between the United States and Iran to a heightened level. It would seem plausible that Iran would look specifically to respond by targeting high-value American personnel and assets due to Soleimani’s importance to Iran’s leadership.
Our view is that yesterday’s events have significantly increased geopolitical risks within the region but may not illicit the immediate Iranian response the markets are expecting. Instead, we believe the consequences will reverberate for months and years to come. One simple (energy market related) example is the potential impact on the continuation of the OPEC+ agreement past its currently planned expiration at the end of March 2020. The region is highly complex. It is impossible to predict with any degree of accuracy the long-term political and economic effects of yesterday’s event except to say that it exacerbates an already difficult political situation and will have long-term consequences in the region.