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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Tight Oil Markets Are Ignoring Supply Risk

Aframax tanker

The global oil market is once again in flux as geopolitics and regional conflicts take an increasingly heavy toll on oil supplies. Since the OPEC meeting in Vienna, warning signs that oil markets are heading for a shortage in supply, due to low spare production capacity and growing security threats in and around the Persian Gulf, have not been taken into account.

The perceived oil production increase from the OPEC and Russia agreement has not materialized in full. Analysts are even reporting that the spare production capacity of Saudi Arabia is less than 500,000 bpd.

This lack of production capacity must now become a major point of focus as, in addition to the ongoing Iran-U.S. confrontation in the Strait of Hormuz, Iranian backed Yemeni Houthi rebels have once again attacked Saudi oil tankers in the Red Sea. In response, Saudi Arabia has suspended oil shipments through the Bab El-Mandeb Strait for an undisclosed period of time.

Aramco stated that “in the interest of the safety of ships and their crews and to avoid the risk of oil spill, Saudi Aramco has temporarily halted all oil shipments through Bab El-Mandeb with immediate effect. The Company is carefully assessing the situation and will take further action as prudence demands”.

Even though no casualties have been reported, the current situation is undeniably dangerous and has been escalating this year.

So far in 2018, the Houthis have threatened to increase their attacks on Saudi or Arab Alliance owned vessels. On April 3, a Saudi tanker was shot at with a projectile from Houthi fighters. Several other Houthi attacks have been reported against commercial vessels in the Red Sea and Bab El Mandeb area lately. Related: Are Oil Markets Underestimating Iran’s Threats?

(Click to enlarge)

The Saudi reaction to these attacks is likely to lead to an upward oil price movement as it has emphasized the level of risk in the area. Around 1.2 million bpd of Saudi oil and petroleum products pass through the strait.

For Saudi Arabia’s customers – this development in undoubtedly going to cause problems. A slowdown of Saudi products to key markets in the U.S. and EU will have an impact on prices. The market may soon realize that the time of secure oil supplies is now behind us.

Tightening supplies and geopolitical risks need to be reassessed and revalued in today’s market. Without high crude storage levels and an almost diminished spare production capacity, the slightest disruptions can start a price run. Bulls have been warning market observers about the tightness of global markets for several months now – yet markets are barely reacting to new outages and threats. Related: Saudi Arabia Halts Oil Shipments At Key Chokepoint

If the Bab El Mandeb situation deteriorates further, putting all other vessel movements at risk, or increasing insurance costs substantially, the market will soon be facing the prospect of a renewed oil price rally.

Shortages in the market have already been forecast, but these were all centered around the prospect of Iran sanctions. If you add to that the tensions in the Bab El Mandeb region, we are looking at a far more bullish market.

While Iran’s threats to close the Strait of Hormuz did stir some fear in analysts, it is not as significant as the Bab El Mandeb area. The Bab El Mandeb is not militarized by U.S.-NATO naval forces – which means it is far more exposed to attacks than the Strait of Hormuz.

Oil markets are already tight and geopolitical tensions across the globe seem to be rising, but the latest development in the Bab El Mandeb Strait should be treated as a key warning sign that analysts need to reevaluate risks in the oil market.

By Cyril Widdershoven for Oilprice.com

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