The Risk of a Regional War in the Middle East

Oil markets now view the Middle East conflict as having escalated to its most dangerous point since October 7th, and Iran's anticipated response to the killing of the leader of Hamas will now determine whether this is going to be a full-blown regional (or wider) war.

Early on Wednesday, Israel assassinated Hamas leader Ismail Haniyeh. The fact that Haniyeh was assassinated on Iranian territory cannot go unanswered, putting Tehran in a very difficult position. It has no choice but to respond, and the response will need to be proportional. In turn, a truly proportional response at this time will mean a full-blown war that directly involves Iran instead of its proxies. Iran will have to get creative now in order to avoid a direct confrontation.

The latest round of escalation in this conflict began with a Hezbollah attack on the Golan Heights on Saturday that killed at least 12 people, most under the age of 16. Israel retaliated with a strike on Beirut, targeting a senior Hezbollah commander. An Israeli drone launched three missiles on a building in a Beirut suburb, killing three people (as far as we know) and wounding scores of others. Israel was targeting the head of Hezbollah's military operations, Fouad Shukr. The Israelis claim Shukr was killed in the attack, while Hezbollah has not confirmed.

Just hours later, Israel launched an assassination campaign inside Iran, killing Hamas leader Ismail Haniyeh on Wednesday morning. Iran's Revolutionary Guards confirmed that Haniyeh was killed just hours after attending the inauguration of the new Iranian president.

On Thursday, Israel confirmed that Hamas' senior military commander Mohammed Deif had been killed in a strike inside Gaza on July 13th. At the time of the July 13th attack, Gaza's Hamas-run health authorities claimed the strike had killed more than 90 people but had failed to kill Deif.

Iran denied any role in the Golan Heights attack by Hezbollah and now has vowed retaliation for the assassination of Haniyeh on Iranian territory. The nature of the strike is embarrassing for Iran's Revolutionary Guards, who were charged with Haniyeh's security.

It was a brazen move by Israel, but it's not the first time Israel has conducted an assassination on Iranian territory (nuclear scientists). The Israelis tend to get away with such operations, none of which has so far led to all-out war, which Iran clearly wishes to avoid (also tied into the Supreme Leader's adoption of a 'reformist' president).

While Iran does appear to want to avoid an all-out war, the situation is becoming increasingly unpredictable due to ongoing internal divisions within both Iran and Israel, with both governments containing a more hawkish and aggressive faction. Responding to an attack on Iranian soil while avoiding an escalation in the conflict promises to be a precarious balancing act.

Iran and its proxies were tentatively set to meet on Thursday to discuss options for retaliation from multiple venues, which could include Iraq, Syria, Lebanon, and Yemen most prominently. Also on Thursday, Iranian officials met with their Saudi counterparts, who are eager to avoid any further escalation, with the Saudis hoping that a gesture to further expand ties with Iran will work to simmer things down. The Saudi-Iran rapprochement has miraculously survived Israel's war on Gaza - so far. On this level, the Saudis and Iranians are being extremely pragmatic, and that (more than anything else) is keeping the lid on further escalation, assuming this detente can continue to withstand the pressure.