Oil price spikes, then retreats after assassination of top Iranian general — but what’s next?

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The assassination of Iranian top military official Qassem Soleimani outside Baghdad airport last week caused a near 4% surge in oil prices and a drop in share prices as investors took fright at the prospect of an all-out war between the U.S. and Iran. Not long after, however, oil prices retreated over 4% to below $60 per barrel Wednesday morning after President Donald Trump said Iran appeared to be “standing down.”

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In reality, while that remains a possibility, a more likely outcome is an ongoing lower-level exchange of tit-for-tats as evidenced by Iran’s attack overnight earlier this week on two airbases housing U.S. and coalition forces in Iraq.

The bases at Ain al-Assad base in Iraq’s Anbar province and a facility in Erbil (in the autonomous Iraqi Kurdistan region) were targeted with an unconfirmed number of surface-to-surface ballistic missiles, but estimated to be up to 22.

No casualties have yet been reported, but gold surged above $1,600 an ounce for the first time in almost seven years, while safe-haven currencies like the yen strengthened against the dollar.

Reports elsewhere variously describe nighttime redeployment of U.S. troops from the capital to the provinces, safeguarding against further attacks and as a prelude to a full pullout – a move the White House categorically denies will take place.

Nevertheless, non-key personnel operating in unprotected areas, like oil fields and humanitarian projects, are being pulled out, causing some concern that a wholesale withdrawal could impact oil production.

In reality, short-term output is unlikely to be hit. Iraqi personnel are perfectly capable, oilprice.com reports, of keeping production at current levels. In the medium to longer term, Iraq will need Western equipment and skills to maintain, let alone increase, oil production targets.

The more immediate reaction we are seeing in the oil price is due to the fear of oil production facilities being hit and impediments to the movement of crude oil out of the region, particularly through the Strait of Hormuz.

But strategic analyst firm Stratfor suggests in a recent Worldview report that while volatility is to be expected, Iran is much more likely to target U.S. military targets than to risk diplomatic fallout from supporters like Russia and China by hitting crude or liquefied natural gas (LNG) traffic through the Strait of Hormuz or the Bab el-Mandeb waterways. Nor is it likely to repeat strikes against Saudi Arabia or neighboring oil facilities, as it did against the Abqaiq and Khurais facilities, where it could hide behind the claim they were carried out by Houthi rebels.

To overtly attack Saudi Arabia, as they have done against the U.S. overnight in Iraq, would be a significant further escalation. One can sense the Iranians feel, certainly the regime feels at home, that it has the moral high ground and can legitimately attack U.S. military targets in retaliation for Soleimani’s assassination.

Stratfor suggests the wider market is not keen to see a sharp escalation in the oil price, much as it would like the short-term increase in revenue. OPEC knows higher prices will reignite U.S. shale oil drilling at a time when stable prices and high debt are weighing on the shale sector and likely to create significant headwinds for further increases in output in the year ahead.

While that may not be high on the priority list for the regime in Tehran, further escalation notwithstanding, Iranian targets are likely to remain military and diplomatic in nature, rather than oil and gas infrastructure — which, while certain to cause volatility, should cap steep rises in the oil price.

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All bets are off, of course, if the tit-for-tat gets out of control and both sides start hitting each other’s oil infrastructure; it is to be hoped Iran is aware it has more to lose on that front than the U.S. does, though.

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