The Iranian Elections and Oil Volatility
Background
The Islamic Republic of Iran held its presidential elections over the weekend; an event that came on the backdrop of poor economic performance, a nuclear deal talk hanging in the balance, and a change in leadership in the US and Israel. Furthermore, the election could have potential consequences for the commodities market, especially oil.
Ebrahim Raisi, Iran’s new president and former Chief Justice, won almost 62% of the votes amidst low voter turnout. Either way, the elections are done. And the most likely candidate won. Various news outlets have described the new Iranian president as a hardliner and his victory reportedly signaled the rise (or return) of the conservative faction vis-à-vis the reformists.
Consequences
This recent victory could have major consequences for the region’s politics as well as for global markets. Foremost, Iran’s relationship with Israel might become even more confrontational. This isn’t to deny the shadow war that occurred under the supposed reformist government of Hassan Rouhani where Iran allegedly supported Hezbollah, Hamas, Assad, the Houthis and other militants in Iraq. But things could get a little hotter. While the likelihood of an open, all-out war remains dim, we expect more confrontation both in frequency and lethality. The recent replacement of Netanyahu by Naftali Bennett means the Israeli government will remain hawkish vis-à-vis Iran. It remains to be seen how this will play out (assuming the Israeli collation doesn’t fall apart).
At the global level, the change at the White House might add some lull to the US-Iran struggle in the Persian Gulf especially when compared with the very risky moves of the Trump administration which culminated in the killing of General Solemani. Again, the threat of all-out war remains dim under Biden. But the underlying tensions remain. What will happen if there is a heated conflict (open or by proxy) between Israel and Iran? Or how will the US react if its service men (and women) come under fire by Iran-equipped fighters? A more anti-US Iranian administration mixed with a hawkish Israeli government could prove an explosive combination.
The above scenarios could lead to wild spikes in the price of key commodities, especially oil. Iran maintains significant presence in the Strait of Hormutz, the strategic chokepoint that accounts for over 21 million barrels of oil shipment per day. The country has occasionally harassed ships or threatened to close the strait. A more hawkish government could see increased threat levels which could affect oil supplies and/or lead to greater volatility in oil futures. Add to this the recent increase in the frequency of attacks on oil tankers in the Persian Gulf and we could be in for wild movements.
Conclusion
In conclusion, Iran looks unlikely to openly confront against its avowed enemies. Fears about possible change in the country’s stance in the ongoing nuclear deal may be misplaced since the country needs the sanctions relief and its economic benefits. More so, a successful deal could see Iran pumping almost 1.5 million barrels of oil into the global markets. However, there is no gainsaying that the rules of the game might change as the hardliners move to assert themselves and demonstrate their difference vis-à-vis the reformists.
