How Does The US Assassination of General Soleimani Effect Energy?
This week, energy markets have been processing the ongoing conflict between the United States and Iran, a conflict which is shifting from politically dominated back-and-forths to outright military attacks. In this blog, we take a look at the issues behind this long running dispute and why it might have come to a head in early-2020 with the assassination of General Soleimani.
In the 1950s, the British government had grown increasingly concerned over Iran’s policies under the 35th Prime Minister Mohammad Mosaddegh, particular regards their loss of control over the Iranian oil industry, which the British had been majority shareholders in since 1935. Around the same time, the US had begun publicly denouncing Mosaddegh’s policies as harmful to the country amid intense Cold War fears. With diplomatic relations severed, UK and US intelligence agencies orchestrated a coup ousting him as Prime Minister in 1953. Iran would serve under Shah Pahlavi control, heavily financed by the US, in return for their large share of the restored British holdings, until 1979.
In January 1979 the US-backed Shah was forced to leave the country amid growing unrest and numerous demonstrations against his rule. Islamic religious leader Ayatollah Khomeini returned from his exile in February and following a referendum, the Islamic Republic of Iran was proclaimed in April of that year. With tensions still high, the Tehran-based US embassy was seized and the hostages were held for 444 days; the final 52 being freed on the day of Ronald Reagan’s inauguration in January 1981.
Since then, diplomatic relationships between the US and Iran have remained extremely strained, with more recent animosity centring around Iran’s apparent secret nuclear weapons programme during the 2000s, culminating in widespread sanctions from the Western world against Iran.
Tensions appeared to ease under new moderate rule from 2013 and in 2015, an accord was reached whereby Iran agreed to limit nuclear activities and permit international inspection of their facilities in return for these sanctions being lifted.
However, this period of relative peace did not last long as Donald Trump abandoned the nuclear deal in May 2018, reinstating economic sanctions against Iran as well as threatening the same action to those who continue to buy Iranian oil. Iran’s currency crumbled and a recession ensued. Over the last 12 months, incidents between the two countries have become relatively commonplace eventuating in last Friday’s assassination of General Soleimani.
Historically disputes between the Western world and Iran have centred around oil supply and the influence that Iran has on the global oil complex. Similarly, strategic attacks have been carried out on oil tankers, routes and facilities. However, Donald’s Trump’s address on Wednesday 8th January seemed to change the narrative away from oil supply: “We are now the number one producer of oil and natural gas anywhere in the world. We are independent and we do not need Middle East oil” commented Trump, shifting the focus of concern to Iran’s nuclear ambitions and its role in terrorist activity.
So far, Iran’s sole response to the missile attack on US airbases in Iraq, which tactically have not resulted in any named casualties, does not appear to have ignited the situation further and for now, energy markets have returned to normal. In the immediate time following recent trigger points, markets did reacted heavily, chiefly with oil swinging around 10% intra-day. However, the impact on trading activity was short-lived and exaggerated, seemingly driven by fear and risk perception rather than concrete fundamentals.
So, if the recent geo-political tensions aren’t based on oil supremacy then what might have driven the conflicts, and why now?
One reason that has been suggested by domestic media is that this is a political power play by Trump in an attempt to appeal to his Republican stronghold states who react positively to any show of American force on the global stage. The timing of the attack is also interesting in the run up to the US November elections. This type of political play is not without precedence and is something that Trump is acutely aware of as illustrated by his his November 2011 tweet criticising long-term rival Barack Obama: “In order to get elected, @BarackObama will start a war with Iran”.
What is important for energy prices at the moment is that with such a public downplaying of the importance of any US-Iranian disputes and conflicts on oil and other energy markets, and an evidenced lack of market impact from the recent Iranian retaliation, while you shouldn’t take your eye off the news stories on Iran, it is important to retain focus on supply and demand fundamentals in a system that is still over-supplied and appears to exert continued bearish pressure on prices.
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