Oil traders will find Middle East power struggle harder to ignore

In the past 14 days Saudi Arabia، the world’s largest oil exporter، has faced a barrage of missiles aimed at its capital city، an attack on a supertanker hauling 2m barrels of crude، and a second missile launch aimed at oil storage tanks on its Red Sea coast.

Oil prices، normally a reasonable barometer of geopolitical risk in the Middle East، have responded to these attacks from Houthi rebels in Yemen by falling 3 per cent over the same time period.

Oil traders، distracted for now by a brewing trade war between the US and China، are at risk of growing complacent. But it is unlikely they will be able to discount Saudi Arabia’s conflict in Yemen much longer.

Since Riyadh entered Yemen’s war in 2015 the oil market has changed dramatically. At the time، crude markets were awash with excess supplies created by the US shale industry and Opec’s post-2014 decision to pump full blast.

That allowed the loss of supplies from Yemen — which were above 400،000 barrels a day in the early years of this decade — to be readily discounted، even as they slowed to less than 10 per cent of that level.

The fighting، largely confined to the Arabian peninsula’s poorest country، was seen as of limited risk to the wider oil market، whatever the humanitarian catastrophe that unfolded.

But the oil industry is in a very different place today. Opec is back to managing supplies through output curbs and the market is significantly tighter than it was three years ago as demand has grown strongly. Any disruption to oil supplies now would be felt much more keenly، even as US shale production breaks new records.

The Houthi attacks over the past two weeks also suggest an increased willingness to wage a concerted effort targeting the economic lifeblood of the kingdom، a move Riyadh is unlikely to take lightly.

While the recent attempts to hit Saudi oil shipments or energy infrastructure have been thwarted، with the kingdom’s oil minister، Khalid al-Falih، describing them as “a desperate attempt” that would fail to disrupt oil supplies، analysts are increasingly unnerved.

With the rebels widely seen as enjoying backing from Iran، Saudi Arabia’s fellow Opec member and regional rival، the potential for the oil market to be hit by secondary effects from the conflict increases.

Helima Croft، a former CIA analyst who heads RBC Capital Markets commodity strategy team، this week told S&P Platts it had become the “most dangerous confrontation for the oil market”، describing it as a potential “tripwire for a direct confrontation between Saudi Arabia and Iran”.

Iran، which most military analysts believe must have supplied the ballistic missiles capable of reaching Riyadh — more than 500km from the Yemen border — is itself feeling greater pressure on its oil supplies as tension with Saudi Arabia has mounted.

Saudi Arabia’s powerful crown prince، Mohammed bin Salman، has been in the US the past two weeks، lobbying not just for investment and partnerships as part of his economic transformation plans but also for increased pressure on Iran.

Donald Trump، the US president، will decide next month on whether to withdraw from the Iran nuclear deal، which he has described as “the worst” ever negotiated، potentially hitting Iran’s crude exports again after sanctions curtailed Tehran’s oil sales between 2012 and 2015. His appointment of noted Iran hawk John Bolton as national security adviser does not suggest a change of course.

Though the Iranian oil volumes affected are likely to be less this time without the support of the EU and other US allies that still support the nuclear deal، it would still arrive at a time when the oil market is already tightening.

While Saudi Arabia — the only country with significant spare oil production capacity — may see an opportunity in lower Iranian oil exports to capture additional market share، such a move would do little to soothe tension between the two countries.

In the meantime، a successful attack by Houthi rebels on a Saudi oil shipment، refinery or storage facility would be a significant escalation. A direct ballistic missile hit on a residential area in Riyadh، which has so far depended on US-produced Patriot missile defence systems to avert more damage from the attacks، would also be likely to demand a more severe response from Saudi Arabia.

The next ministerial Opec meeting in Vienna، when the Saudi Arabian and Iranian oil ministers next come face to face، is a little over two months away.

What was expected to be a simple rollover of their supply deal، which many expect Saudi Arabia to push the cartel — and Russia — to agree later this year to extend it into 2019، may become a lot more interesting. Oil traders should be paying attention.

Edited by Rasha Mohamed