Comments below are from 22V Research based in New York: https://22vresearch.com/about/
Updated Middle East Thoughts
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January 29, 2024
The death of US servicemen by the hands of Iranian proxies in Syria/Jordan changes the equation in the ME – this is no longer just Iran pushing back against Israel in Gaza, but Iran pushing back against the entire US presence in the ME though these gradual escalations, starting with drones/missile attacks on bases in N Iraq/Syria, over the Houthies in Red Sea to now drone attacks that killed US troops. This will see a major escalation in the US response, most likely directly targeting Iranian personnel/assets in the region. This means the US will most likely essentially adopt the Israeli strategy of targeting IRGC personnel around the ME, targeting their bases, supply routes and likely also ships. These is some similarities with the circle of violence that led to the US killing of Qassem Soleimani, then head of the IRGC, in Bagdad in 2020 – expect senior IRGC leaders outside Iran to be in the US hit list now.
It also seems likely that Iranian ships assisting the Houthis in the Red Sea will now be targeted (strange actually that they haven’t already), as will any IRGC speed boats/assets in the entire Gulf region. At the same time though, I do not believe Biden will heed the call of some GOP senators to “bomb Iran”, i.e. attacking actual Iranian territory. This remains a proxy war, but surely all Iranian personnel outside Iran will now be fair game for US air/missile strikes.
Biden will need to calibrate the response sufficiently to show Iran that they cannot win the “ladder of escalation” and of course avoid opening himself to attacks from GOP for being weak during the campaign, but on the other hand seek to avoid a full-blown war with Iran in the region, putting oil supplies etc. at risk. I continue to believe that this is not desired by either Iran or the US, and that while the killing of senior Iranian IRGC leaders in the region must now be expected, full-blown war will be avoided.
Main question will be whether Israel will use the opportunity to attack Hezbollah in Lebanon, knowing that Biden cannot now – with Iran having killed US troops – not support Israel against Iran’s main proxy in the region. I think therefore that the risk of an Israeli attack on Hezbollah in Lebanon will now have increased significantly, again leading to a rising risk of further escalation by Iran against the oil trade in the Persian Gulf.
Pushing against the risk of all out escalation by Iran against say Saudi oil installations if Hezbollah is attacked is the economic role of China and implicitly Russia. China’s economy is weak and will not benefit from rising oil prices from a war, and it is not a coincident that Jack Sullivan talked to Wang Yi about this recently. An “all out” war with the US would surely also see direct US attacks on all Iranian missile production sites, jeopardizing their ability to supply Russia with these weapons, so while Russia may have an economic interest in higher oil prices, if it comes from a direct frontal military conflict with the US, this will jeopardize their military supplies from Iran.
Overall, the level of proxy fighting in the ME will now increase, as the US once again will seek to reestablish its supremacy on the escalation ladder by “hurting Iranian assets in the region”. The risk of war in South Lebanon via an Israeli attack will have increased significantly, as Bibi takes advantage of this opportunity to expand and prolong the war (and his premiership) and that the IDF gets to fight Hezbollah largely at a time of their choosing with a major US presence in the region (the best military option, if you believe as the IDF that a fight with Hezbollah is inevitable at some point). Expect more shooting therefore in the region and likely somewhat higher risk premia. At the same time, I continue to believe that a direct confrontation with Iran will be avoided and that the direct attacks on Gulf oil facilities will similarly be avoided.
Note also that this makes the likelihood of Congressional supplementals to pay for the war, including assistance to Ukraine, will now have increased (even more than the apparent progress on the border issue suggests).
Last thought on oil markets must also increasingly – following Ukrainian long-range drone attacks on Russian oil facilities in St. Petersburg, Novorossisk and today Yaroslavl – assume that Ukraine will have the technical ability to pursue a successful strategic campaign against Russia’s oil/gas export infrastructure. This should be factored into any energy market risk premia too. Note that Ukraine is utilizing domestically produced drones for this, so this is not something the West can veto (though of course they could ask nicely
).