January 3, 2020 / 12:25 PM / 24 days ago

Breakingviews - Middle East strife’s market toll is just beginning

Iranian Revolutionary Guard Commander Qassem Soleimani walks near an armoured vehicle at the frontline during offensive operations against Islamic State militants in the town of Tal Ksaiba in Salahuddin province March 8, 2015. REUTERS/Stringer/File Photo - RC278E9D90EE

LONDON (Reuters Breakingviews) - Market ructions triggered by flaring Middle East tensions have a lot further to run. Oil prices rose more than 3% and stock markets around the world fell after a U.S. air strike killed Iran’s top military leader, Qassem Soleimani. The scale of these price moves understates the dangers of such a destabilising act.

The rise in oil prices is less than a third of the instant bump up in crude values after September attacks on Saudi Aramco installations, which temporarily knocked out half of Saudi’s oil supply. Back then, investors expected U.S. President Donald Trump to retaliate on Saudi Arabia’s behalf. When he didn’t, oil prices subsided. But long-running tensions between the United States and Iran are now far more likely to ratchet up.

Soleimani was head of the Quds, the elite force of Iran’s Revolutionary Guards, who fought and inspired proxy wars in Yemen, Syria, and Iraq. He was also an iconic symbol of Iranian resistance, and close to Supreme Leader Ayatollah Ali Khamenei. Tehran will feel it has to respond to his death.

Retaliation could take the form of strikes on U.S. allies such as Saudi Arabia and the United Arab Emirates, American bases in Qatar and Bahrain, or ships in the Gulf. But it is most likely to focus on Iraq, where Iran-backed militias have recently been targeted by U.S. air strikes, and 5,000 American troops are stationed. A logical initial response would be to target U.S. oil installations like those held by Exxon Mobil. U.S. oil workers are already leaving, the Iraqi oil ministry said.

Serious disruption to Iraqi supply would not hit crude prices as badly as a closure of the Strait of Hormuz, the Gulf choke point through which 20% of the oil that is consumed globally passes. Saudi and fellow energy producers only last month agreed production cuts to offset forecast weaker demand so there should be spare capacity to address fears of shortfalls that cause oil prices to spike. But given Iraq constitutes 5% of the world’s annual 100 million barrels per day of supply, the cost of a barrel of crude could rise further. And if the confrontation draws in other players in the region, investors in all asset classes will have a real war, not just a trade one, to worry about.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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