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What Do Drone Attacks Mean For The Iran Nuclear Talks?

The latest Houthi attack in the Middle East - deadly drone strikes on targets in the United Arab Emirates (UAE) on Monday - has shifted the attention of oil market participants from Omicron concerns to the geopolitical risk premium in prices coming from yet another flare-up of tensions in the most important oil-producing and exporting region in the world. 

The Monday attack on UAE, claimed by the Iran-aligned Houthi movement, could also further complicate what look like already very difficult negotiations in the Vienna talks about the United States and Iran returning to the so-called nuclear deal, which could ultimately lead to the removal of sanctions on Iran’s oil exports. 

Iran has denied it is supporting the Houthi rebels in Yemen either financially or militarily, but the rest of the world considers the movement a proxy of Iran’s policies in the region. 

The Islamic Republic, in a carefully worded statement, referred to the attacks as “recent Yemen-linked developments” and said attacks were not a solution to the crisis in the region. 

“The attacks would not impact the nuclear talks in Vienna. These are two separate issues,” a senior Iranian official told Reuters on condition of anonymity on Tuesday. “What happened yesterday was the result of ongoing crisis in Yemen,” the official added. 

However, analysts doubt a Houthi strike on an Arab Gulf country that is an ally of the United States and Saudi Arabia would have come without Iran’s knowledge or consent.  

“I think the issue we’ve got to determine, first of all, was it the Houthis directly,” Angus Blair, professor of practice at the University of Cairo in Egypt, told CNBC on Tuesday. “Nothing would have happened without Tehran’s consent or direct engagement.”

The attack with drones on Monday, for which the Houthi rebels have claimed responsibility, killed three people and blew up fuel tanker trucks near storage facilities owned by the Abu Dhabi National Oil Company (ADNOC).

The Houthis claim there will be further attacks, while the Saudi-led coalition fighting the movement launched airstrikes on Yemen’s capital in retaliation of the attack on the UAE. 

Apart from the numerous signs of tightness in the physical crude market, oil futures have reflected this week the growing risk premium after the attack on the UAE in the most important oil-producing and exporting region in the world, home to the most vital oil shipping chokepoint, the Strait of Hormuz. 

Risk premium aside, the renewed Iran-vs-Arab Gulf tension could complicate the already complex Iran nuclear talks, which resumed in the autumn after a new hardline Iranian president took office. Since the resumption of the talks, little progress has been made on the major issues, and both sides have sounded pessimistic about reaching an agreement. 

Oil market analysts have already deferred projections for a legitimate return of Iran’s crude to 2023, and the latest flare-up in the Middle East could complicate the talks even more. 

In the latest news reports out of Vienna, Iran is reportedly demanding a legal guarantee from the United States that it would not ditch the agreement again and restore sanctions on Iranian oil, diplomats involved in the talks told The Wall Street Journal earlier this week.

Meanwhile, U.S. Secretary Antony Blinken warned that the window of opportunity for a deal is closing. 

“We have, I think, a few weeks left to see if we can get back to mutual compliance,” Secretary Blinken told NPR in an interview last Thursday.

The attack on the UAE could further complicate reaching an agreement, but it will surely return the oil market’s focus to its most important - and most restive - region, the Middle East. 

The attack “will concern oil-market watchers, who are also keeping a close eye on the trajectory of ongoing nuclear talks between the U.S. and Iran,” Torbjorn Soltvedt, principal MENA analyst at risk intelligence company Verisk Maplecroft, told Bloomberg this week. 

“With negotiators running out of time, the risk of a deterioration in the region’s security climate is rising,” Soltvedt added, noting that the attack highlighted the continued threat to energy infrastructure in the Middle East, whose risk premium in oil is now “coming a lot more sharply.” 

By Tsvetana Paraskova for Oilprice.com

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Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More