Iranian Revolutionary Guards drive a speedboat in front of an oil tanker at the port of Bandar Abbas. Atta Kenare | AFP | Getty Images

The U.S. killing of Iran's most revered military leader could be more impactful for the oil market than other recent incidents that have just temporarily spiked crude prices. Iranian Gen. Qasem Soleimani, who led the Iran Revolutionary Guard's Quds Force and built Iran's terror network across the Middle East, was killed by the U.S. in an airstrike at the Baghdad International Airport in Iraq. Oil futures Friday afternoon were about 3% higher with West Texas Intermediate oil futures at about $63 per barrel, off its early high just above $64. International Brent crude futures were up 3.6% at about $68.67 per barrel. While oil backed off the day's highs, oil analysts expect the price to remain volatile and slightly elevated with the potential to move much higher, if there are further actions.

"I think we're in unchartered waters," said Helima Croft, head of RBC global commodities strategy. "This is not a run-of-the-mill general being assassinated. This is where it becomes really challenging for the market. I don't think this is a one off. You may have a reprisal. It may be quiet for a period, then there could be another incident." Analysts say Iran's unpredictability and web of proxies, like Hezbollah, creates an unmeasurable risk factor for the price of oil that the market is not reflecting, and it makes for an even bigger wild card because Iran can operate through them like a rogue nation.

'They have to do something'

Iran's supreme leader, Ayatollah Ali Khamenei, said Soleimani's work will not end, and "severe revenge" awaits those who were responsible for his death. Analysts say Iran's retaliation could be aimed at oil or military facilities, or even come as cyberattacks "The Iranians can't lose face over this. They have to do something," said John Kilduff, partner at Again Capital. He expects the upper range for WTI crude to be $70 per barrel, and Brent to be $80 to $85 per barrel. "There's still a big cushion and a ton of spare capacity in Saudi Arabia. We're not in the dire tightly supplied market we were in a few years ago." Iran's economy has been severely damaged by U.S. financial sanctions and an oil sales ban, and as pressures intensified, attacks blamed on Iran or its proxies have increased. Tankers have been attacked in the Strait of Hormuz, but the most stunning and shocking incident was the attack on Abqaiq and Khurais in Saudi Arabia, in September that temporarily knocked out 5.7 million barrels a day of Saudi Aramco production.

It was the first major attack on Saudi Arabia's oil facilities and a wake-up call on a potential vulnerability, but the kingdom was able to make up for the shortfall by using its own reserves as it repaired the facilities.The price of oil rose briefly after the Aramco attack but quickly backed down after the impact on world oil supply looked to be minor. There was also a muted market reaction In May of last year, when four commercial ships anchored in the United Arab Emirates were hit by explosive charges causing large holes in their hulls, just above the waterline. Then a month later, two more oil tankers were attacked by what were widely believed to be limpet mines, explosives that are attached to the hull of a ship with a powerful magnet. Those attacks happened in the Gulf of Oman just outside of the Persian Gulf. Iran never claimed responsibility for any of the attacks. The Islamic Republic is also believed to be responsible for several cyberattacks in Saudi Arabia including one targeting petrochemical plants in the kingdom in January 2017. Iran also targeted the U.S. banking industry in 2012. "Since May, there's been a series of provocative incidents. The question is, what is the tipping point?" said Croft. Kilduff said it's hard to tell when Iran will strike back, as it has been deliberate in its attacks and is not always the apparent perpetrator. "I unfortunately think think Iraq is going to be the battleground. There will be a ton of mischief. You could see Iraq oil production in the cross hairs," he said.

Battleground Iraq

It was Iraq, where Soleimani was believed to be organizing further attacks on U.S. personnel and assets after an attack on U.S. forces in Kirkuk last week. During the past week, the U.S. Embassy was under siege in Baghdad by protesters who supported an Iranian-backed militia.

"It's the theater where you could have this type of confrontation between the U.S. and Iran. This situation remains very volatile, very fluid and the Iraqi government is caught between the U.S. and Iran," said Croft. There were recent protests in Iraq against Iran's involvement in Iraq's affairs. "I think they're tired of Iranian backed groups that have siphoned off government revenue and oil revenue. It's not like Americans are adored either. They are a reminder of the Iraq war and occupation. One of the biggest risks is the operations of U.S. companies in Iraq," she said. Dan Yergin, vice chairman of IHS Markit, said Soleimani's importance cannot be understated, as he masterminded the patchwork of terror proxies across the Middle East. He also had once been in the shadows but has more recently had celebrity status in Iran. "He was the author of mayhem. You could already see there was rising tension," said Yergin. Souleimani was also one of the most important people in the region and used his proxies to make sure Bashar al-Assad of Syria remained in power. "You also would take seriously what they said in the Defense Department statement. They may well have had knowledge that Soleimani was playing for the end game which was to force the U.S. out of Iraq," Yergin said.

Just 40% chance of war?

Henry Rome, Iran analyst with Eurasia Group, expects retaliation by Iran, but he sees only a 40% chance of all out war. "Iranian leaders are proud and quite risk acceptant. We expect moderate to low level clashes to last for at least a month and likely be confined to Iraq," he wrote. "Iran will also likely resume harassment of commercial shipping in the Gulf and may launch military exercises to temporarily disrupt shipping. Finally, it will respond in asymmetric ways that we cannot predict, akin to the Iran-backed attack in 1992 against a Jewish community center in Argentina. Beyond retaliation, Iran's ultimate goal in Iraq is to make continued American presence unviable."

A damaged pipeline is seen at Saudi Aramco oil facility in Khurais, Saudi Arabia, September 20, 2019. Hamad Mohammed | Reuters

Rome says that Iran is not likely to attack Saudi Arabia or oil infrastructure in the Emirates, and it should stay away from the U.S. bases in Saudi Arabia, the UAE, Bahrain, or Qatar. "These steps would have the effect of unifying the Gulf against Tehran; Iran will instead target its ire against Washington in the near term," Rome wrote. "The Iranian actions will stop short of what we would consider war." Iraq, if it is in the firing line, is a big target for the oil market, and it is OPEC's second largest producer, pumping about 4.6 million barrels a day. That is close to the record 4.5 million barrels exported by the U.S. last week, according to U.S. government data. It was the first time exports surpassed 4 million barrels a day.

Shale effect