Gulf ceasefire leaves market facing known unknowns

LONDON – When Donald Trump completed his trip to Saudi Arabia, Qatar and the United Arab Emirates in May, complete with trillion-dollar pledges of investment, the Middle East seemed on the path to stability. A month on, following a 12-day war between Israel and Iran, the US bombing of Iranian nuclear facilities, and a retaliatory missile attack by Tehran on Qatar, the question is whether the ceasefire arranged by the US president can revive the previous optimistic mood. There are too many known unknowns for that to be the case.

Oil traders are behaving as if everything is back to normal. Brent crude contracts for August delivery were trading at USD 69 a barrel early on Tuesday, where they were just before Israel attacked Iran on June 13. The subsequent price spike to USD 80 a barrel allowed for the possibility that Tehran might retaliate by disrupting the tankers carrying a fifth of global oil supply that pass by its southern coast. Tuesday’s post-ceasefire price plunge implies that risk has receded.

If Saturday’s US attacks on Iranian nuclear facilities destroyed any prospect of the country obtaining an atomic bomb, oil traders would be right to be relaxed. Coupled with the diminished powers of Iranian proxies like Hezbollah, the region would be tangibly safer than before. Yet it’s far from certain that the nuclear threat has been defused. Iran’s Supreme Leader Ayatollah Ali Khamenei remains in place, and the location and condition of Iran’s stocks of enriched uranium are unclear.

Iran also looks less stable. The Islamic Republic has lost a slew of senior military leaders, and Monday’s relatively ineffectual retaliatory strike on Qatar projected weakness more than strength. Iranian authorities have sped up the search for a replacement for the 86-year-old Khamenei, five insiders with knowledge of the discussions told Reuters, but the process to replace a leader in power since 1989 may not be smooth.

Meanwhile, it’s far from clear that Israel’s campaign is over. Military success will likely shore up Prime Minister Benjamin Netanyahu’s governing coalition. Yet while Netanyahu has declined to say explicitly he is seeking regime change in Iran, he has said it “could be a result” of Israeli attacks. On Tuesday morning, Iran and Israel both claimed the other had violated the terms of the truce.

Officials in Saudi, the UAE and Qatar also have scope to feel relatively optimistic. After all, even if Iran’s nuclear capabilities have not been “totally obliterated”, as Trump claimed, progress has probably been extensively delayed.

Yet those countries arguably had the same reassurance ten years ago when the United States and other leading countries signed the Joint Comprehensive Plan of Action to limit Iran’s nuclear plan. More recently, Trump had seemed on a path to restoring the agreement.

Instead, Middle Eastern countries now face a potentially unstable mix: a vengeful and chastened Iran, and an Israel that feels there is unfinished business. There is plenty of scope for future shocks.

CONTEXT NEWS

Israeli Defence Minister Israel Katz said on June 24 he had ordered the military to strike Tehran in response to what he said were missiles fired by Iran in a violation of a ceasefire announced hours earlier by US President Donald Trump.

However, Iran’s ISNA student news agency said reports that Iran had fired missiles at Israel after the ceasefire took effect were false.

Both Israel and Iran had confirmed the ceasefire after it was announced by Trump.

The pan-European STOXX 600 Index was up 1.4% at 542.6 points, as of 0708 GMT. Brent crude prices dropped to USD 67 a barrel in earlier trading but rose to trade at USD 69 a barrel as of 0850 GMT.

(Editing by Peter Thal Larsen; Production by Oliver Taslic)