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Trump, Middle East and Oil

A confrontation between the U.S. and Iran has been brewing ever since Trump repealed the Joint Comprehensive Plan of Action (JCPOA) informally known as the Iranian Deal.

When it comes to Middle East, rhetoric and oil prices go in tandem. The more belligerent the former, the higher the later. With the recent killing of General Soleimani by U.S. administration, a new game of brinksmanship is set afoot.

We have been here before. Last year there were incidents that raised the specter of a military action by the U.S. for instance when Saudi tankers were attacked or when an American drone was downed supposedly by Iran. The most severe and serious one was the Abqaiq attack. There were reports that Trump called off an operation with jet fighters air-borne and mid-way to Iran. However, with the embassy attack in Iraq and rising tensions in Middle East, this killing of IRGC’s General can exacerbate matters. One observer has even said that this strike on Soleimani “far eclipses the deaths of Al-Qaeda leader Osama Bin Laden or ISIS founder Abu Bakr al-Baghdadi in terms of strategic significance and implications”.

Crude oil has already jumped and other safe haven assets can be seen rallying as well. Brent oil crossed $70 and WTI is around $65. Iran has announced that it will no longer abide by the limits contained in the Nuclear Deal. Iraq’s parliament has vowed to expel American troops from their ground.

There were some rumors regarding Iran attacking U.S. military sites inside Baghdad but were later spurned by U.S. Trump has already threatened Iran to not to retaliate as doing so will bring in further strikes by the administration.

Geopolitical Risk premium is back in the financial markets. We might see Iran attacking some tankers or ships in the Gulf as U.S. has warned of a “heightened risk” of attacks there. If and when that happens Gold and Oil will both surge!

We still have to wait and observe Iran’s action in order to see how this latest Middle Eastern escalation will unfold.

 

By: Osama Rizvi

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