Breaking News:

California Senator Revives $15 Billion Oil Divestment Battle

Houthi Tanker Seizures Could Reignite the War Premium in Oil Markets

The risk premium for oil prices resulting from the ongoing Israel-Hamas War has not risen as dramatically as it did after Russia invaded Ukraine on 24 February 2022. This has largely been due to the exceptional job done by the U.S. in preventing a widening out of the conflict across the region, which would almost certainly produce a massive spike in oil and gas prices. Part of the U.S.'s success has been down to extremely deft diplomatic efforts across the Middle East, spearheaded by Secretary of State, Antony Blinken, involving the use of serious carrots and equally serious sticks. The other part has been due to the same approach being used on China, which, through its multiple projects centered around its 'Belt and Road Initiative' (BRI), wields enormous influence over several key power players in the region. This was again highlighted in the 10 March relationship resumption agreement between the Middle East's major Sunni power, Saudi Arabia, and its major Shia power, Iran - a deal exclusively brokered by China, as analyzed in depth in my new book on the new global oil market order. However, the rise in oil and shipping insurance premiums following the 19 November seizure by the Iran-backed Yemeni Houthis of Israeli-owned cargo ship Galaxy Leader highlighted that the war-risk premium connected to the Israel-Hamas conflict for the global oil sector could spike at any time if the current delicate diplomatic balance is lost.

The key to this is whether the U.S. can continue to exercise influence over China, which has become the major superpower player on the ground across the Middle East since Washington effectively abandoned that role in a series of withdrawals from the region. These effectively began with its unilateral exit from the Joint Comprehensive Plan of Action ('nuclear deal') with Iran in 2018, and then its pull-out from Syria in 2019 - including protracted internal White House discussions about the catastrophe of pulling out from the strategically crucial Al-Tanf exclusion zone that was the tri-border junction of Syria, Jordan, and Iraq - then Afghanistan in 2021, and finally its end of combat mission in Iraq in December 2021. China stepped into the power vacuum created by the U.S. withdrawal through the expansion of finance offered to its targeted Middle Eastern countries via the BRI project and by leveraging the influence that Russia had built up in the region over decades, especially across the Shia Crescent of Power, centered on Iran and Syria. China laid the groundwork to effectively make Iran a client state through the all-encompassing 'Iran-China 25-Year Comprehensive Cooperation Agreement', as first revealed anywhere in the world in my 3 September 2019 article on the subject and also fully examined in my new book on the new global oil market order. By dint of this, Beijing has also been able - with very active assistance from Russia - to exert a similar control over neighboring Iraq, which has long been heavily influenced by Iran through several political, economic, and military proxies.

Aside from unlimited access at deeply-discounted prices to the vast oil and gas reserves of the Middle East, China's other principal objective in its dramatic expansion across the region has been to control all the key transport routes for the world's oil and liquefied natural gas (LNG) supplies that come out of the Middle East. China already had much control over the Strait of Hormuz through its 25-year deal with Iran. The same deal also gave China a hold over the Bab al-Mandab Strait, through which crude oil is shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This was achieved as it lies between Yemen - heavily controlled by the Iran-backed Houthis, and now subject to the new China-brokered relationship deal between Iran and Saudi Arabia - and Djibouti, over which China has also established a stranglehold. It should not be forgotten that prior to the seizure of the Galaxy Leader cargo ship on 19 November - supposedly for being 'Israeli-owned' - Iranian forces seized two oil tankers in a week at the beginning of May in and around the Strait of Hormuz. Neither the Niovi nor the Advantage Sweet were anything to do with Israel. Instead, a senior oil industry figure who works closely with the European Union's (E.U.) energy security complex exclusively told at the time, that Iran seized them to demonstrate that it still had control over that transit route and, perhaps even more importantly, it was done with the full blessing of Beijing

As a result of those two seizures in May, oil and shipping insurance prices did rise, albeit temporarily, as also happened after the taking of the Galaxy Leader. It is interesting to note, though, that the price follow-through has been limited, despite threats from the Houthis' spokesman, Alameed Yahya Saree, that the group intends "to sink" Israeli ships in the Red Sea. "Currently, the oil market can see that the U.S. is successfully preventing the Israel-Hamas War from widening out, but that can change very quickly, especially if China decides for whatever reason to take its foot off the brake with Iran," said the E.U. source. Even with Chinese pressure for moderation, Iran has already betrayed its true intention of widening out the Israel-Hamas War on two notable occasions. The first was early in the conflict when it warned Israel not to expand its attacks on Hezbollah in Lebanon. The second occurred earlier this month when Iran's Supreme Leader, Ali Khamenei, called on the Islamic members of OPEC to halt oil exports to Israel immediately. The veiled threat was of a full oil embargo from all Islamic OPEC member states on countries that support Israel in the War. 

Saudi Arabia did exactly the same thing in 1973 for exactly the same reason - a war between Israel and Islam, as it also sought to portray it. The upshot was the 1973 Oil Crisis that saw oil prices spike around 267%, from about US$3 per barrel (pb) to nearly US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil-importing countries of the West. A broader oil embargo of the sort that Iran still wants would have similarly dramatic effects, if not worse. According to the latest assessment by the World Bank, a loss in global crude oil supply of 6-8 million bpd - which it refers to as a "large disruption" scenario comparable to the 1973 Oil Crisis - would result in a 56-75% increase in prices to between $140 and $157 a barrel. However, a broadening out of the embargo on Israel by the Islamic members of OPEC, as called for by Iran, would likely lead to a much bigger loss of global oil supplies than the World Bank has calculated. The Islamic members of OPEC are Algeria, with an average crude oil production rate of around 1 million barrels (bpd), Iran (3.4 million bpd), Iraq (4.1 million bpd), Kuwait (2.5 million bpd), Libya (1.2 million bpd), Saudi Arabia (9 million bp), and the UAE (2.9 million bpd). This totals just over 24 million bpd - or about 30% - of the current average total global production of about 80 million bpd. 

It is apposite to note in this context that last week also saw Iranian Foreign Minister, Hossein Amirabdollahian, state that "flames of war will spread across the Middle East" if the Israeli truce with Hamas is not extended. And 27 November saw the Iran-backed Houthis significantly escalate tensions even more in the region - especially with the U.S. - by firing missiles at the U.S. Navy destroyer, the USS Mason, off the coast of Yemen. The U.S. ship had been responding to a distress call from the Israeli-linked chemical tanker, Central Park, in the Gulf of Aden at the time.

By Simon Watkins for

More Top Reads From

Back to homepage

Loading ...

« Previous: China Allows Export Of Small Amounts Of Critical Minerals

Next: China’s Coal Boom Undermines Its Clean Energy Success »

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More