Rystad Energy reports that supply disruptions in the Middle East over and above an already tight crude market could send oil prices up violently
Two Saudi Arabia oil tankers were reportedly attacked off the UAE coast this weekend, sending crude futures sharply up on May 13.
Bjørnar Tonhaugen, head of oil market research at Rystad Energy, said, “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 due to the contamination of the Urals, maintenance in Kazakhstan, plus planned maintenance in the North Sea during the summer months.
“The oil market is reacting 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,” he added.
The incident took place near the Strait of Hormuz, the most important oil artery in the world. Around 40 per cent 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 per cent of Saudi Arabia’s crude exports and 75 per cent 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 purchasing or face sanctions by 1 May 2019. The end of the so-called Iran sanction waivers programme prompted Iran to renew its threat of closing the Hormuz Strait.
“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,” he 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,” he noted.
However, any disruption to the flow of oil through the Strait of Hormuz would have unknown consequences for the region’s stability. The risk of sparking an escalating conflict implies that the threats that have been expressed recently are probably rhetorical in nature, with less likelihood of the ‘oil weapon’ actually being set in motion.
