Energy, (Geo)Politic & Money - 2024.04.15
Welcome to another special edition of EPM, where we provide a deepdive analysis of the Iranian attack on Israel over the weekend.
Welcome to another special edition of EPM, where we provide a deepdive analysis of the Iranian attack on Israel over the weekend. Amidst a significant amount of hyperbole, we are here to provide you the facts, and help you make sense of them, to enable clear eyes assessment of how things are likely to develop and what this will mean for global markets, not in the least the oil markets.
First regarding what actually happened. Iran attacked Israel on the evening of Saturday the 13th of April and the morning of Sunday the 14th. The attack involved a combination of drones, rockets and ballistic missiles, some 300 projectiles in total. The attack caused only modest damage, Reuters writes, as most projectiles were shot down by Israel's Iron Dome defense system and with help from the United States, Britain, France and Jordan.
As to why Iran attacked, Reuters writes that in an official statement Iran’s mission to the United Nations said, “Iran’s military action was in response to the Zionist regime’s aggression against our diplomatic premises in Damascus.”
In our EPM update from 2024.04.02, the Monday following Israel’s attack on the Iranian embassy compound in Damascus, Syria, EPM said that the Iranian response would be determined by the US. The facts revealed so far indicate this is indeed what has happened.
Immediately following the Israeli attack, Reuters writes, Iran and the US entered into dialogue. Iran's Foreign Minister Hossein Amir-Abdollahian at that time summoned the Swiss diplomat who represents US interests in Iran. He said at the time that through backdoor channel "an important message was sent to the American government as a supporter of the Zionist regime”.
These communications have continued since. Axios writes that last week, German Foreign Minister Annalena Baerbock spoke with Iranian Foreign Minister Hossein Amir-Abdollahian on the request of the Biden administration. During this conversation, Amir-Abdollahian said Iran would attack Israel, but “in an appropriate and limited way” in order to avoid escalation. Baerbock conveyed a message from the US, warning Amir-Abdollahian not to go too far.
As a result of these communications, The New York Times writes that among informed defense analysts the dominant view became that Iran would strike Israel in a way that would allow it to save face, but measured enough to not arouse an even fiercer counterstrike.
In the last few days before the Iranian attack, the communications intensified. Reuters writes that the Iranian Foreign Minister Amir-Abdollahian on Sunday, after the attack, said that Iran gave neighbouring countries and the US 72 hours notice it would launch the strikes. Turkey's Foreign Ministry said it had spoken to both Washington and Tehran before the attack, adding it had conveyed messages as an intermediary to be sure reactions were proportionate. "Iran said the reaction would be a response to Israel’s attack on its embassy in Damascus and that it would not go beyond this. We were aware of the possibilities. The developments were not a surprise," said a Turkish diplomatic source. Iraqi and Jordanian officials also said Iran had provided early warning of the attack last week, including some details.
EPM notes that the fact that Iran utilized drones launched from Iranian territory, is a further indication its objective was to avoid serious damage on Israeli soil, and thereby limit the risk of further escalation. The drones require a number of hours to reach Israeli territory, and Iran notified the US immediately following their launch, Reuters writes. This provided Israel and the US ample time to prepare their defense systems, as the Iranian rockets were timed to land in Israel at the same time as the drones. Had Iran instead launched its rockets first, or instructed its ally Hezbollah to attack Israel from Lebanese or Syrian territory, Israel and the US would have had significantly less time to prepare and the damage on Israeli soil would likely have been significantly greater. Considering these alternative options, The Guardian writes that Iran’s attack as “choreographed and telegraphed” with “almost zero chance it was going to inflict damage on Israel”.
Now as to the EPM view on what is likely to happen next.
Oil prices will likely rise during trading on Monday. Although the initial reaction during trading early Monday morning in Asia was muted, Reuters writes, an additional $2 to $5 of additional risk premium is not impossible in the EPM view, which would push Brent towards the $90 per barrel again.
But, Iran has said it is now done, and that it will not attack further. Reuters writes that in an official statement Iran’s mission to the United Nations said, “The matter can be deemed concluded.”
The US is at the same time pressing Israel to prevent it from responding. Axios writes that during a call on Saturday, President Biden told Israeli prime minister Benjamin Netanyahu that the US won't support any Israeli counterattack against Iran. "You got a win [killing the Iranian Revolutionary Guard general in Iran’s Damascus embassy, red.]. Take the win," Biden told Netanyahu. Axios adds that when Biden told Netanyahu that the U.S. will not participate in any offensive operations against Iran and will not support such operations, Netanyahu said he understood.
As a result, the EPM base case scenario is that no Israeli reaction will take place, and that as a result, over coming days the market will slowly but steadily realize that it has overshot on the risk premium, bringing oil price down again.
The risk to this scenario we see comes from Israeli arrogance and overconfidence. Throughout its attack on Gaza it has on various occasions gone against the asks and even demands of the US. It is not impossible that it decides to “go it alone” in a response to Iran, because, as EPM discussed previously, Netanyahu has an interest in prolonging Israel’s current war. Members of his government, meanwhile, believe that Israel has an interest in a broader Middle Eastern war, with the US playing an active role on Israel’s side, as this would weaken Israel’s neighbours and thus enable Israel to achieve better terms in future Abraham Accords.
An Israeli response would effectively be a further escalation of its conflict with Iran. While this could be managed militarily and diplomatically, it would further increase the risk of the public dissatisfaction across the Middle East spilling over into an Arab Spring-like uprising, which in the EPM assessment remains hidden below the surface. For example, Jordan’s active military intervention on the weekend to protect Israel is unlikely to go down well with its citizens, a large number of whom are displaced ethnic Palestinians. Since this risk appears largely ignored by the actors on the geopolitical stage, this might be where the surprise for the market will come from.