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An overview of the Iran-US conflict and how it affects oil markets

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01/10/2020 | 06:53am EDT

Oil markets, and financial markets as a whole, are once again shaken by a resurgence of geopolitical tensions in the Middle East. Here is an overview of the conflict between Washington and Tehran.

Post-Daesh Iraq

The decline of the Islamic state, which controlled much of north-western Iraq, has done little to strengthen the government. Since the end of 2015, the terrorist organization has suffered defeat after defeat, losing its strongholds in Tikrit, Falluja and Mosul, the country's second largest city, in 2017. This setback was made possible by the joint offensive of antagonistic groups, those of the Iraqi government forces supported by a coalition under American command, Shiite militias supported by Iran and Kurdish fighters, to name but the main ones.

The defeat of Daesh thus allowed the return of foreign forces to Iraq, since the government was incapable of defending its sovereignty alone, but also Tehran's hold on its neighbor thanks to its involvement in structuring the Shiite militias. In a prosaic way, post-Daesh Iraq is a state under American-Iranian tutelage, which is the culmination of the current crisis.

Moreover, this interference from outside the country shook Iraq at the end of 2019. Vast protest movements mobilizing thousands of Iraqis reject it, denouncing the corruption that is plaguing the current government. These demonstrations were suppressed in blood. The figures speak for themselves: hundreds of people died between October and November 2019. Iraq is thus deeply mired in a new political crisis. The resignation of the Iraqi Prime Minister, Adel Abdel-Mehdi, but above all the inability to find a unanimously agreed successor, is the symbol of this.


Escalating tensions


Act I: Threat to US interests in Iraq [December 27, 2019]

While sporadic attacks against US targets in Iraq already existed and were tending to increase, the December 27 attack on a military base in Kirkuk was a turning point. Indeed, the rocket attack claimed the life of an American victim, a subcontractor operating within the anti-Jihadist coalition. Washington believes that pro-Iranian Shiite factions are responsible for the attack.

Act II: US retaliation against Kataeb Hezbollah (Hezbollah's phalanxes) [December 29, 2019].

Weapons storage units and headquarters of Kataeb Hezbollah, pro-Iran Shiite factions, were targeted by air raids, resulting in numerous casualties. The death toll is reported to be 25 dead and 51 wounded. The wheels of escalating tension between Washington and Tehran are beginning to turn. The position of the White House remains to be firm in the event of a threat to its interests in the Middle East, while Iran denounces a "flagrant violation of the sovereignty" of Iraq.

Act III: Attack on the American embassy in Baghdad [December 31].

Angered by the attacks, several thousand demonstrators sympathetic to the Iranian cause entered Baghdad's Green Zone, tried to penetrate the American embassy and set fire to the outside compound. The Prime Minister appealed for calm while the American Army sent reinforcements to secure the American Embassy. Trump threatened Iran, and accused the country of being behind this.

Act IV: US strike against Iranian high-ranking officials [January 3]

US forces target a convoy of vehicles in the Baghdad airport compound. With a drone, they killed General Quassem Soleimani, leader of the Al-Quds forces, the armed wing of the Revolutionary Guards operating abroad. Washington attacks a symbol of Iran, Soleimani being considered the number two of the Islamic Republic of Iran after Rohani. In total, the strike claimed ten victims, including five Iranian high-ranking officials and pro-Iranian Iraqi high dignitaries.

The escalation continues at a frantic pace, with numerous calls for revenge from the Iranian authorities, the Iraqi government's condemnation of the offensive and the dispatch of 3500 additional troops to the Middle East.

Act V: The First Consequences [January 5]

Iranian leaders are promising reprisals and even an explosion in the region. Iran is freeing itself from its obligations on the nuclear agreement and announces that it will continue nuclear enrichment "without any limits and according to its technical needs".

The Iraqi government, for its part, is appealing to the UN Security Council to demand a condemnation of the United States. The Iraqi Parliament is also demanding the expulsion of foreign forces from Iraq. In this way, Iran, paradoxically agitating the threat of an armed response, seeks above all to expel the United States from Iraq, a vacuum that could be filled by the influence of Tehran.

Act VI: Iranian response targeting US bases in Iraq and first signs of de-escalation [January 8].

The Iraqi authorities have stated that 22 ballistic missiles have targeted the locations of coalition forces in Iraq, including Ain Al-Asad and Erbil air bases. The same authorities said that they had been informed of the impending strikes, allowing the coalition forces to prepare in advance of the strikes. The human toll is thus nil, with no casualties as a result of the Iranian reprisals. These notified strikes are paradoxically interpreted as a gesture of appeasement on the part of Iran, which, while keeping its face, puts pressure on the United States to find a diplomatic solution. Trump, in an address from the White House, therefore played the appeasement card by declaring that "The United States is ready to welcome peace".

In this context, while tensions are still high in the Middle East and the political situation in Iraq has not improved in any way, a precarious balance has been struck. Tehran has flexed its muscles to convince and calm public opinion, the United States is neutralizing pro-Iran high-ranking officials, including Soleimani, who posed a threat to its interests, and the Gulf countries are relaxing as a result of de-escalation.

The impact on oil markets

The escalation of tensions between Iran and the United States has naturally supported oil prices. However, it remains difficult for markets to gauge the impact of recent frictions on oil supplies (read here: Gold and Oil, how to react to geopolitical tensions).

Iran does have the capacity to cause some nuisance in this respect, through its proxies, notably in Yemen where the Houthi rebels have stated that they have listed a number of sensitive sites in Saudi Arabia and the United Arab Emirates as potential targets. The Strait of Hormuz, a strategic zone where nearly 20% of world consumption transits, also constitutes a means of action for Tehran. A policy of harassment aimed at destroying the security of this maritime corridor would open up a period of uncertainty on the oil markets without even addressing the possibility of a military escalation.

Stocks mentioned in the article
ChangeLast1st jan.
BASE CO., LTD. -2.14% 5950 End-of-day quote.120.10%
BASE,INC. -5.94% 11240 End-of-day quote.540.46%
LONDON BRENT OIL 0.53% 37.86 Delayed Quote.-38.33%
WORLD CO., LTD. -2.36% 1323 End-of-day quote.-50.84%
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