Oil Hits 8-Month High after US Kills Iranian General

Yesterday, we said that 2020 will have a hard time living up to the geopolitical drama of last year. We may have spoken too soon.

Oil prices are soaring higher this morning following a US military strike on Iranian General Qasem Soleimani in Iraq last night. Crude oil prices are up by more than $2/bbl this morning as Iran vows retaliation. Currently, crude oil is trading at $63.40, up $2.22 (3.6%), though down from an 8-month high above $64 seen earlier this morning.

Fuel prices are also rocketing higher this morning, in line with crude gains. Diesel prices are trading at $2.0767, up 5.3 cents (2.6%). Gasoline prices are $1.7586, gaining 5.4 cents (3.2%).

What Happened

Last night, a drone strike at Baghdad International Airport killed Major General Qasem Soleimani, along with several Iraqi militia members backed by Tehran.

General Soleimani was the leader of Iran’s Revolutionary Guard elite Quds Force, a secret group spreading Iran’s influence beyond their border. Recently there has been a slew of escalatory activity between US and Iranian proxy forces in Iraq, including an attack on the US embassy in Iraq. As head of the Quds Force, Soleimani was instrumental in orchestrating attacks like these as well as coordinating other proxy groups.

The Pentagon claims that the strikes were retaliation against the “hundreds of Americans” killed by Soleimani’s plans, and that he “was actively developing plans to attack American diplomats and service members in Iraq and throughout the region.” Secretary of State Pompeo hinted at an “imminent attack” being planned by Soleimani.

What Makes the Attack Significant

There are a number of things that make this attack more significant than other recent attacks in the Middle East.

1. Soleimani was a major leader in Iran. Some had pointed to Soleimani as the next president of Iran, and he had significant sway within the country. As a major general over Iran’s foreign military activities and a war hero from the Iran-Iraq war in the 80s, he has been a leader in fighting terrorist threats such as ISIS, al Qaeda, and other terrorist groups, in addition to his attacks on US soldiers and allies. The NY Times reports that Soleimani was considered a second foreign minister behind Minister Zarif.

2. Soleimani was the head of Iran’s asymmetric military strategy. For years, Iran has been developing the capabilities of asymmetric war through proxy networks. Intelligence officials believe Iran was behind the September attack on Saudi oil infrastructure, using proxy agents to wreak havoc on enemies and their allies. Given the myriad attacks in the Middle East pinned to “Iranian-backed groups”, the blow is a direct response to Iran’s asymmetric warfare approach.

3. The strike is a shift from US restraint. Following the Saudi oil attack, Trump tweeted that the US was “locked and loaded” and ready for a confrontation with Iran – yet no action occurred. When a UAV was shot down near Iran, Trump came to the brink of launching missile strikes on Iran but stood down at the last minute. This attack, following the death of a US contractor and attacks on the US embassy in Iraq, is a symbol to allies in the region that the US is taking a more direct approach.

What’s Next?

Iran declared a three-day period of mourning for their fallen general, so don’t expect an immediate reaction. Still, the country has warned that “harsh retaliation is waiting.” Iran’s Supreme National Security Council reportedly received orders to retaliate “in exact proportion” to the strike.

While some local police agencies such as NYPD and LAPD have gone on alert for any possible retaliation, most experts expect Iran’s response to take place closer to home, likely in Iraq or another Middle Eastern country. For oil markets, rising tensions in the Middle East have once again put traders on edge. The September Saudi attack shows that oil infrastructure is a target, and Iraq is one of the largest oil producers in the world.

Iraq’s Parliament will meet tomorrow to address the strike, and some believe the country may call for the expulsion of American troops from the country. In contrast, Secretary Pompeo posted a video that allegedly shows Iraqi citizens celebrating the strike.

The strike represents a significant escalation in tensions between the US and Iran, and while this may not be the blow that leads to direct conflict, it will certainly continue the tit-for-tat exchange that has brought the two countries much closer to open confrontation. For oil markets, it appears Iran will play a major role in driving volatility, uncertainty and risk premiums into commodity prices.