Threats to Gulf oil supplies rattle markets

Tensions in the Gulf show how easily a serious oil disruption can result from political missteps or sabotage, causing crude prices to be pushed upward.
Sunday 19/05/2019
Emirati officials take a photo of the damaged Andrea Victory ship at the Port of Fujairah, May 13. (Reuters)
Foul play. Emirati officials take a photo of the damaged Andrea Victory ship at the Port of Fujairah, May 13. (Reuters)

Attacks targeting Saudi oil tankers and infrastructure and US sabre-rattling in the Arabian Gulf have unnerved oil markets. Crude prices rose amid fears that an all-out conflict between Washington and Tehran that jeopardises Gulf oil supplies could push prices into the stratosphere.

The markets had been focused on more bearish political and economic indicators that had been keeping a lid on oil prices, including the escalating US-Chinese trade drama, fear of weakening global energy demand and signs that surging US oil production would cover lost Iranian and Venezuelan oil.

However, tensions in the Gulf show how easily a serious oil disruption can result from political missteps or sabotage, causing crude prices to be pushed upward.

Reports that four oil tankers — including two Saudi vessels — were the targets of a “sabotage attack” May 12 near the Emirati port of Fujairah and the Strait of Hormuz drove oil prices up more than 2% — about $1 per barrel — May 13. Prices retreated later that day on US-Chinese tit-for-tat tariff increases as trade negotiations between the two world superpowers appeared to deteriorate.

Saudi Oil Minister Khalid al-Falih said the two Saudi tankers that were attacked suffered “significant damage,” though there were no casualties or oil spilled. The two other tankers were UAE- and Norwegian-flagged.

The US Maritime Administration cautioned of an “increased possibility that Iran and/or its regional proxies” could target oil tankers, commercial ships or military vessels belonging to the United States or its allies in the Red Sea, Bab el Mandeb Strait and the Arabian Gulf.

The Trump administration stoked fears of a potential conflict with Tehran May 5 by announcing it was sending an aircraft carrier strike group and a bomber task force to the Gulf and followed that May 10 by moving a Patriot missile system and second warship to the region.

That the tanker attacks occurred near the Strait of Hormuz are concerning, because the narrow waterway is the strategic choke point for vessels carrying about one-fifth of the world’s oil needs. Tehran threatened to close the strait following Washington’s recent decision to deny Iran’s remaining oil customers sanctions waivers.

It is not the first time that Iran threatened to disrupt Hormuz traffic. Iran could temporarily block the strait but Tehran’s navy is no match for US naval might and the blockade would likely not last for more than a few days.

Last July, Riyadh suspended oil shipments through the Bab el Mandeb Strait, which separates the Red Sea from the Indian Ocean, for ten days after two Saudi tankers were attacked by Yemen’s Iran-backed Houthi militia.

Houthi rebels essentially claimed responsibility for the drone attacks on Saudi Aramco’s East-West pipeline May 13. The explosive-laden drones attacked pump stations on the 1,200km pipeline that carries crude from Saudi Arabia’s Eastern province to the Yanbu port on the Red Sea. One station reported minor damage and a fire that was quickly contained.

Falih described the pipeline attack as an “act of terrorism” that, combined with the assaults on the tankers, threatened the world’s oil supplies and global economy.

Saudi Aramco closed the pipeline to restore the damaged pump station and assess the line’s condition but subsequently reopened the line May 14.

The Saudi-led coalition fighting in Yemen targeted the Houthi rebels’ drone-making infrastructure in Sana’a in April following several instances in which Saudi aerial defences intercepted drones that Riyadh claimed were directed at densely populated Saudi civilian areas.

Oil markets responded to the news of the drone-ambushed line by sending prices up May 14 by as much as 1.4%. Oil prices gained considerable ground May 16, in part in response to reports that the Saudi-led coalition carried out numerous air strikes on Houthi rebel military targets in Sana’a and elsewhere in Yemen in retaliation for the tanker and pipeline incidents.

Both US benchmark crude West Texas Intermediate and UK benchmark crude Brent settled up 85 cents for the day at $62.87 per barrel and $72.62 per barrel, respectively.

Saudi Deputy Defence Minister Prince Khalid bin Salman posted on Twitter May 16 that the attacks on the Saudi pipeline show that the Houthi militias “are merely a tool that Iran’s regime uses to implement its expansionist agenda in the region.” He said the pipeline attack was ordered by Tehran.

Iranian Foreign Minister Mohammad Javad Zarif denied that Tehran was behind the tanker attacks, blaming “radical individuals” working to pull Iran and the United States into war.