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Iran-US conflict: more to come?

With the US’s killing of top Iranian general Qassem Soleimani, the risk of attacks on Mena oil infrastructure is likely to increase

With the US’s killing of top Iranian general Qassem Soleimani, the risk of attacks on Mena oil infrastructure is likely to increase

The Gulf region is wondering if Soleimani’s death and subsequent Iranian missile attacks on US bases in Iraq is the end of a chapter—or just the start. Despite US president Donald Trump’s more conciliatory remarks in early January, analysts still favour the pessimistic view. 

“Our base case is that Iran will continue to counter the US’ maximum pressure campaign on many fronts; one will be on oil and gas tankers and infrastructure, a second on the US presence in Iraq and a third which would be to go directly after US interests,” says Torbjorn Soltvedt, principal Mena analyst at risk consultancy Verisk Maplecroft. “What has happened with Soleimani lowers the threshold for Iran to engage in destructive activity in the region and beyond.” 

Ratcheting up

The move from US forces in early January marked a dramatic shift in tensions between the two countries, spinning oil prices upwards by around 4pc, although the market subsequently retreated and is now under serious downward pressure as the potential impact on demand from the Coronavirus pulled traders’ attention away from the Middle East.

“Iran will continue to counter the US’ maximum pressure campaign on many fronts” Soltvedt, Verisk Maplecroft

Iran waited until after the funeral of Soleimani to begin its retaliation, targeting US military bases in Iraq on 7 January. More may be to come. “This is not going to be the end of the game, Iran demanded complete removal of the US military forces from Iraq and ultimately from the region,” says Sara Vakshouri, policy and security analyst at consultancy SVB Energy. “This means that the 7 January attack will not be the end of Iran’s retaliatory actions.” 

Unlike Iran-linked attacks in the summer of 2019 which focused on showing Iran’s capability to target strategic oil chokepoints—like alternative export routes close to the Strait of Hormuz—any upcoming Iranian mobilisation is increasingly likely to follow the pattern of September’s drone attack of Saudi oil processing facilities by causing material infrastructure damage and impact on physical oil flows, Soltvedt predicts.

Election uncertainty

Iran is gearing up for parliamentary elections in February with its oil production at the lowest point in many decades, down from some 4mn bl/d to around 2mn bl/d today. The country closed 2019 with oil exports averaging below 500,000 bl/d since May—when the US ended sanctions waivers—compared with a high of around 2.7mn bl/d in April 2018. This systemic change has greatly impacted the Iranian economy, with estimates of around $3bn per month in lost oil revenue, and the economy expected to contract by 10pc this year, according to Verisk Maplecroft. 

In the country’s last major poll, the 2017 presidential election, Hassan Rouhani won a majority, mobilising the young Iranian vote with his moderate political stance and the promise of a new nuclear deal which would open up the country. But voters will cast their ballots next month amid disillusion among younger Iranians and moderates—a political mood which has helped light the touch paper for deadly protests across the country, including in the oil-rich Khuzestan province. 

The serious socio-economic implications of the fall in oil revenues pose the risk of further civic unrest. Analysts warn Petroleum Economist that, if this domestic pressure continues to mount, the attraction for the Islamic Republic to dangle the distracting carrot of international adventurism against the US will only grow—with potential upward impact on the oil price. 


The stick has already been in evidence. Since protests against the government—fuelled by a 50pc hike in domestic fuel costs—began in November, a harsh crackdown on protesters has resulted in over 180 estimated deaths. The uncompromising response demonstrates how hardliners are back at the forefront of government decisions.  

“The real reformist is more or less excluded from the political process, and Rouhani’s moderate camp has lost its political capital,” says Soltvedt. “Given how violent the crackdown was, it is quite a worrying development.” 

In 2017, voters were offered a fairly binary choice between hardline and moderate positions. But analysts say the picture is less clear this time round. In the past, protests in Iran have had a reform or traditionalist narrative, but the current wave of protests is different in that it seems to be united against the Iranian system as a whole. 

“The 7 January attack will not be the end of Iran’s retaliatory actions” Vakshouri, SVB Energy

Thus, it is not clear that either camp will reap the benefit of the protestors’ grievances. “It is really hard to see what the obvious story of the election is going to be,” says Soltvedt. But, in the absence of a clear signal from this domestic unrest, on a foreign policy agenda “if anything, hardliners will be strengthened by the recent attacks”, he warns. 

On the moderate side, the May collapse of the nuclear deal means Rouhani has lost important political support with his previous voters. And, even though it will damage the, at least theoretically, more US-friendly Iranian political faction, there are scant signs of the US letting up, with Trump—who has, of course, electoral matters of his own on his mind—having repeatedly stated that his administration’s goal is to bring Iranian oil exports to zero.

Tough stance

In late January, the US Treasury’s office of foreign assets control (Ofac) blacklisted more four firms—Hong Kong-based broker Triliance, another Hong Kong firm Sage Energy, Peakview out of Shanghai, and Dubai’s Beneathco DMCC—for facilitating National Iranian Oil Company (NIOC) exports in defiance of US sanctions, providing funds that the US says Iran uses for “its malign activities throughout the Middle East”.

“Iran’s petrochemical and petroleum sectors are primary sources of funding for the Iranian regime’s global terrorist activities and enable its persistent use of violence against its own people,” says US Treasury Secretary Steven Mnuchin.

Below 500,000 bl/d; Iran’s current oil exports

Despite Trump’s crackdown, Iran has forecast some 1mn bl/d of crude exports to balance its 2020 budget, around double current levels, says Mohammad Darwazah, Mena geopolitical analyst at institutional investment analysis firm Medley Global Advisors. In other words, Iran is banking on being able to continue and increase oil exports. Recent events make it nigh on impossible to contemplate how that scenario could play out through dialogue alone.  

Breaking the stalemate

“Our view is that between now and the 2020 US election, it is highly unlikely that a [diplomatic] breakthrough between Washington and Tehran will materialise,” Darwazah adds. “We expect further challenges to Tehran both at home and abroad in 2020.”

Iran may then be tempted to pursue a potential game-changer through non-diplomatic means, although Darwazah also suggests Tehran could wait, though, and bend its approach dependent on whether Trump wins or loses a second presidential term in November. 

The oil market may have temporarily taken its eye off the Middle East— with the potential coronavirus impact on demand currently out-competing the potential for Opec+ to extend production cuts until at least June. But heightened geopolitical risks in the Middle East are unlikely to remain out of the headlines for long.

Iran’s presence in neighbouring Iraq, as well as Iran-linked militia elsewhere in the region, pose significant risks to orderly supply. “There could be a nuance to this game too,” says Vakshouri. “Since the destructive impact of conflict escalation on the US allies in the Gulf is high, these countries might [encourage] the US not to retaliate [to any further Iranian adventurism] and to descale the conflict.” 

Soltveldt agrees that the problems are familiar, but the stakes higher. “We are in uncharted territory, it is a bit more of the same but with even higher risks”.

(UPDATED - 30 January) 

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