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Iraq is at high risk for oil supply disruptions this year, following a flare-up in tensions between the U.S. and Iran-backed militia groups in the country, warned analysts at RBC Capital Markets in a Thursday note.
The embassy compound in Iraq suffered an attack by Iran-supported militiamen on Tuesday. In response, U.S. President Donald Trump tweeted that “Iran will be held fully responsible for lives lost, or damage incurred, at any of our facilities.” He went on to say that “they will pay a very BIG PRICE! This is not a Warning, it is a Threat,” and authorized the deployment of additional U.S. forces to the Middle East.
Wednesday marked a second day of mass protests at the embassy, which came in response to U.S. airstrikes on an Iran-backed militia group on Sunday, but protestors withdrew that evening, according to CNN. The U.S. carried out those attacks in Iraq and Syria as it blamed the militia for a rocket attack that killed an American contractor.
“While the standoff at the U.S. Embassy in Baghdad has seemingly eased for now, the underlying issues that produced the violent confrontation between U.S. forces and the Iranian backed militias remain unresolved,” analysts led by Helima Croft, RBC’s head of global commodity strategy, wrote.
‘We continue to see Iraq as the potential tripwire for a direct clash between Washington and Tehran in 2020.’
“We continue to see Iraq as the potential tripwire for a direct clash between Washington and Tehran in 2020,” they said.
The rocket attack on a military base in Kirkuk that killed a U.S. civilian contractor on Dec. 27 was a “dangerous milestone” —marking the “”first U.S. casualties to occur since the militias launched a new wave of rocket attacks following the White House decision to end exemptions for importers of Iran oil and to tighten the sanctions on Tehran,” the analysts said. The killing represents “something of a redline for the Trump administration” and Sunday’s U.S. airstrikes in Iraq and Syria “marked the most assertive use of American military power in the Iranian regional standoff.
“Moreover, we do not believe this will be a one and done situation,” they said. “As long as Iran remains subject to severe U.S. sanctions — which are sharply upping the economic misery index and causing considerable domestic discord — Iran’s leadership will look to increase the costs for Washington continuing to pursue the maximum pressure policy.”
For now, however, the oil market appears mostly unfazed by the uncertainties in the Middle East, with global benchmark Brent crude prices BRNH20, +0.08% down 13 cents, or 0.2%, at $65.87 a barrel in Thursday dealings.
Still, the RBC analysts pointed out that Iraqi oil output has come under “increasing pressure from the ongoing domestic demonstrations over poor governance and the dearth of jobs and essential services.”
Given that, “Iraq ranks near the top of the oil supply disruption risk in 2020,” they said. “With trade war fears receding, the heightened tensions in the Middle East may be poised to make a more meaningful impact on the oil market in 2020.”
