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Cyril Widdershoven

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Tanker Strikes Spell Doomsday Scenario For OPEC

An attack by an unknown party on two oil tankers in the Gulf of Oman has put the Arabian/Persian Gulf region on edge.

After the possible Iranian attack on three vessels offshore the Emirati port of Fujairah last month, the current attack could be setting the scene for a direct military confrontation. Two tankers, the Front Altair and the Kokuka Courageous, both filled with petroleum and chemical products, such as methanol, were “suspected to be hit by a torpedo”. This statement was made by Taiwanese company KPC and Front Altair’s owner, Norwegian company Frontline and has also been confirmed by the operator of the Kokua Courageous, Bernard Schulte Shipmanagement, which claimed that the ship was damaged in a "suspected attack."   

The last hours, search and rescue operations have been performed by the US, Iran and others. No direct accusations have been made at present, but indicators point to Iran or Iranian proxies, even as Tehran already has denied any involvement.

The oil market is in a state of shock, and many analysts weren’t expecting an increased military escalation between Iran and its Arab neighbors. After the Fujairah attacks, tensions have eased somewhat, but today’s attacks could end the status quo in the Strait of Hormuz.

After two weeks of media frenzy that the bulls have left the market and that OPEC is struggling to quell the negative sentiment in the market, a new reality could be here very soon. Oil prices surged today, incorporating the increased risk of a regional confrontation that could be threatening the majority of oil and gas supplies heading to Asia.

Related: The Most Crucial Pipeline Of The Middle East?

This time, the targets have been chosen very well, as they don’t involve Saudi or Emirate vessels, but Western tankers filled with petroleum products, such as methanol. Based on current information, the involvement of torpedoes, which suggests a high level of planning by sophisticated culprits, could lead to a military escalation in the ongoing US/Arab-Iranian confrontation. If it’s true that the Kokuka Courageous has been hit twice within three hours, it means that the attack is most probably conducted by a submarine or by under-the-radar moving assets, which points at the involvement of a state-level party, and not a proxy in the region. The US Navy’s 5th Fleet, which is patrolling in and around the Gulf region, has already reacted to the attack, as officials stated.

As the heat is on right now, analysts should start to reassess their current oil market predictions, as geopolitics and regional power struggles have returned to determine the market and oil prices for the foreseeable future. The current price slump, which currently dominates the headlines is focusing only at threats to demand growth, which have not yet materialized, yet little is being written about the ongoing struggle on the supply side to produce the right qualities and volumes the market needs.

While some have realized that the price slump was an overreaction, the geopolitical risk premium was put on the backburner, as many didn’t expect a serious escalation. It now seems that the main OPEC parties, Saudi Arabia, UAE, Iran and others, have their own view of the world. A future offshore conflict will not be fought in the Arabian/Persian Gulf but in new waters. The Gulf of Oman, leading to the Strait of Hormuz, or the Bab El Mandab now seems a more feasible theater of war.

Related: Small Crude Build Sends Oil Lower

The timing of the attack today also could be out of a military strategy playbook.  While OPEC+ is struggling even to decide on a day to meet to discuss the potential roll-over of the existing production cut agreement, Iran threatens to effectively render the JCPOA agreement void. The current tanker attack shows the willingness of a party involved to put exponential pressure to force a breakthrough.

If Iran is the culprit the situation can be expected to escalate very soon. Don’t expect any lenience from Riyadh or Abu Dhabi, as both are already at crash course with Tehran with regards to OPEC strategies, market share and the so-called Shi’a bridge in the Middle East. The current escalation is a situation that entails a doomsday scenario, not only for the region, but also for OPEC’s internal structure. If Iran was actually involved, its position inside of OPEC will significantly deteriorate as no party will be willing to even show any inclination to take an objective or positive view on Iran’s dire situation at present. This attack could become also the litmus test of the Saudi-Russian bromance.  If Iran is involved, Moscow will have to put its cards on the table and choose.

Without a serious in fundamentals or a solution to the US-China trade war, the oil market has changed. Geopolitics matter, especially in the current market situation. Demand is still there, and a serious decline still has to materialize. Supply threats, however, are back again, and not US shale, but conventional regional power politics will dominate the headlines.

By Cyril Widdershoven for Oilprice.com

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  • Mamdouh Salameh on June 14 2019 said:
    The title of this article suggests that the author has already made up his mind about the culprit in the tanker strikes and is already projecting a doomsday scenario before facts become available.

    As expected, the US Secretary of State has already blamed Iran for the attack without providing any proof. The attack could have been carried out by the Houthis who possess sophisticated weapons and ability to use them as evidenced by their attacks on Saudi tankers in the vicinity of Bab Al Mandib Strait a few months ago and their attacks on Saudi military targets and oil installations as well as on Abha airport in Jizan. They are retaliating against the genocide being committed against them by the Saudi-led coalition forces.

    Still, Iran must draw some satisfaction from the success of these attacks which demonstrate to the world what could happen to Gulf oil tankers if Iranian oil cargoes were prevented by the US fifth Fleet from passing through the Strait of Hormuz.

    The tanker strikes could never spell a doomsday scenario for OPEC because Saudi Arabia and its allies are not powerful enough to retaliate militarily against Iran even if it was proven without a shadow of doubt that Iran was behind the recent strikes. Moreover, the United States will never take military action against Iran because in so doing it loses the trump card in its hand to blackmail Saudi Arabia and its allies and get their money through arms deals and so-called protection racket against Iran. Furthermore, it risks the loss of its national interests in the Arabian gulf and the Middle East.

    There is no doubt that the escalating trade war between the US and China is creating uncertainty in the global economy and this is adversely impacting on global oil demand and prices. However, this recent rapid decline in oil prices couldn’t be explained solely by the trade war. There are other factors to be taken into account. One is that the global oil market has yet to re-balance and that the existing glut in the market is adversely affecting oil prices. The other factor is that any claims about a loss of Iranian oil exports as a result of US sanctions are highly exaggerated and can never be substantiated. Iran seems to have been managing to export its crude and also evade US sanctions as its own oil minister confirmed a few days earlier. This is adding to the glut in the market.

    OPEC + is set to extend the production cuts till the end of the year. Russia is going to agree to that extension despite some opposition from Russian oil companies because President Putin fully understands the economic and geopolitical benefits Russia gets from bolstering its relations with Saudi Arabia and its growing influence over the global oil market through its cooperation with OPEC.

    The recent attacks on tankers will hardly affect Iran’s position within OPEC. Iran has been isolated inside OPEC for a long while but it is still defiant. Saudi Arabia and Russia have been calling the shots in relation to production cuts and oil prices.

    And contrary to what the author is saying, Russia can’t take sides in the conflict between Iran and Saudi Arabia because it has strategic relations with both though it can exert efforts to build a bridge of confidence between them as it has been doing in the production cut agreements. President Putin has a lot more credibility with both Iran and Saudi Arabia than President Trump and the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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