A weekend drone attack on Saudi Arabia that cut into global energy supplies and has halved the kingdom’s oil production threatened to exacerbate tensions in the already fragile Middle East. The responsibility of the attacks was claimed by the Houthis, a rebel group in Iran, who struck at the world’s biggest petroleum-processing facility. That matters greatly because as a result, the Saudi Aramco, the kingdom’s state–owned oil company was forced to suspend production of 5.7 m barrels a day. It usually produces and exports around 9.8 million barrels of oil (latest OPEC figures) to consumers around the world, primarily in Asia.
Naturally, what this means is a strain in the supply security, and its ripple effects were felt in the oil market where the price of Brent crude surged 18 % (on Sunday evening) before pulling back to a 12% increase. Meanwhile, the strikes also expose the vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market. Although on a short-term basis, oil from strategic storage to meet demand and temper the impact on prices could help, this attack introduces a new irreversible risk premium into the market.
There are two reasons for this risk premium. If the Saudi outrage gets prolonged and oil prices rally significantly, then it is likely that shale producers (primarily the US) will raise output. But there exist constraints on how much the United States can export because oil ports are already near capacity. Second, oil from storage could keep the market supplied for some time, but oil markets will tend to become increasingly volatile if the storage is exhausted and the possibility of a supply crunch arises.
While Saudi Arabia had stopped short of blaming Iran for the attacks, the possibility that Iran has a direct linkage with the attacks was made explicit by Mike Pompeo, along with the U.S government’s damage assessment of one of the stricken oil facilities. These developments come at a time of increasing tension between Iran and the United States. Since the Trump administration’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA)- the nuclear deal with Iran and the renewal of its sanctions has led to an eruption of sorts. From the US launching airstrikes against Iran, to the rise of Iran’s provocation in the Gulf and consequently, Iran’s enrichment of uranium, the situation is teetering on the brink of a war.
The U.S has also maintained a “maximum pressure” campaign against Iran that is meant to throttle its economy already reeling under severe sanctions. On the other hand, however, Trump has expressed his desire to meet Iranian President Hassan Rouhani with no pre-conditions that has roiled some of his top advisers.
Though it would be premature to call the present act of Trump, who had been publicly pining for a meeting with Rouhani, an extension of an olive branch, one should remember that it takes two to tango. And in this, Iran has been vehement in showing its reluctance to come to the negotiating table with him.
What is clear is that the recent spike in the US-Iran tension could spell doom for not only the oil market, but for global energy markets where the Strait of Hormuz has become a maritime flash-point in the US-Iran conflict. For a region that is already reeling under multiple conflicts, what is required is stability and for the sake of it, a bilateral meeting is the most optimal shot.
India Outbound
September 23, 2019
source https://indiaoutbound.org/negotiation-is-the-only-way-forward-drone-attack-in-saudi-arabia/
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