Supply disruptions in the Middle East on top of an already tight crude market could send oil prices violently upward, according to Rystad Energy.
Two Saudi Arabian oil tankers were reportedly attacked off the coast of the United Arab Emirates (UAE) this weekend, sending crude futures sharply up Monday morning.
Commenting on the incident, Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy, says:
“In the short term, the perceived risk of supply disruptions from the area will only add to the premium of short-dated oil contracts compared to deferred contracts on the futures curve, which are already trading at a high premium.”
The tightness in prompt supplies is caused by declines in production from Iran and Venezuela, along with ongoing OPEC cuts, outages in Russia owing to the Urals contamination, maintenance in Kazakhstan, plus planned maintenance in the North Sea during the summer months.
“The oil market is reacting today not because the physical market suddenly has lost more oil supplies, but because of risks that the market may lose more oil in the coming weeks and months given the heightened risk of supply disruptions from the critical Persian Gulf region. Raising tensions even higher, news flows suggest the latest incident might be related to the conflict between Iran and the US, which puts the Strait of Hormuz in play,” Tonhaugen said.
The incident occurred near the Strait of Hormuz, the world’s most important oil artery. Around 40% of the world’s traded crude oil is transported through the waterway between Iran to the north and UAE/Oman to the south. Approximately 90% of Saudi Arabian crude exports and 75% of Iraqi exports pass through this shipping lane, in addition to all oil exports from Iran, Kuwait, Qatar and Bahrain.
The US announced last month that buyers of Iranian oil must stop purchases by 1 May 2019 or face sanctions. The termination of the so-called Iran sanction waivers program prompted Iran to renew its threat to close the Strait of Hormuz.
“Iran has repeatedly threatened to ‘block’ the strait as a ‘weapon’, but due to the importance of the waterway for the global economy and the price of oil, the strait is also protected by the US Navy’s Fifth Fleet and other allies,” Tonhaugen remarked. “Needless to say, if the strait was to be blocked or disrupted, even only for a short period of time, oil prices would react violently upwards. There are limited bypass options to export crude, although Saudi Arabia and the UAE do have limited pipeline capacity to shift some crude exports to the Red Sea or the Gulf of Oman.”
However, any disruption to the flow of oil through the Strait of Hormuz would have unknown consequences for the stability in the region. The risk of sparking an escalating conflict implies that the threats being expressed lately are probably of the rhetorical kind, with less likelihood of the “oil weapon” actually being set in motion.