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New Middle East Proxy War Could Jolt Oil Prices

U.S. sanctions on Iran are now really starting to bite. In contrast to what European media portray, Iran’s oil and gas exports are plunging. Tehran’s ability to supply its Asian customer base has been largely blocked, as Washington has decided not to extend the waivers given to China, India or others to keep on signing crude contracts.

U.S. president Trump still boasts that Iranian exports will be falling to zero, but some tankers are still going to slip through the cracks. ‘Illegal’ crude oil trade will be almost negligible, however, as Iran’s main customers have realized that Washington’s wrath will be real. The mullah regime in Iran also put its trust in a possible European answer, but European companies have chosen to be very cautious, and not to rely on the EU to mitigate potential U.S. sanctions against their operations. The more robust line taken by Washington, supported by Arab allies, seems to be working, as long as analysts are keeping an eye on Iranian oil sector options.

Oil analysts are also not yet worried by the negative impact of the sanctions as the global markets are still reasonably well supplied. This picture, however, could be changing extremely quick, if several underestimated factors begin to play out.

In contrast to the overall reporting, in which a direct Iran-U.S. confrontation seems to be in the making, reality shows that a surprising risk lies in Iraq. Analysts are focusing on the Arab/Persian Gulf, due to the announcement made by Washington that a significant U.S. naval force is steaming up to the region, partly to project U.S. military power and to counter a possible Iranian move to block the Strait of Hormuz. But the real conflict could play out in Iraq.

Washington admitted that it has been warned of possible attacks by Iraqi militias or IRGC proxy groups in Iraq on U.S. forces. The latter, as indicated by Tehran officials, would not only be in Iraq but potentially in the whole region. This proxy-war approach by Tehran has been expected for a long time, as Iran understands that a full-blown military confrontation with the U.S., and potentially its Arab allies, would not end well for the mullahs. Even if the conflict would be costly for both sides, the outcome is clear. Related: High-Cost Oil Faces Existential Risk

This strategy, as already has been employed by Iran’s IRGC troops in Syria, Lebanon, Yemen and parts of Iraq, would however be much harder to quell. Not only would the U.S. be forced to spread its forces, but low-level intensive military operations in mainly civilian areas would also constrain a U.S. response. It would also be very hard for Washington to compel European allies and the international community to form a united front against Iran.

Several analysts have already suggested that the first possible battleground of this looming conflict will be in Iraq. U.S. Central Command spokesman Urban reiterated previously that “the USCC has seen preparations by Iran and its proxies to attack U.S. forces in the region”.  U.S. forces based in Iraq are the easiest to attack. Iraqi Shi’a militias are spread over the whole country, and more often than not are operating under the flag of the Iraqi government.

Taking into account the presence of hardline fundamentalist groups in the area, Tehran can mount a strong force without officially taking part in attacks against the U.S. The same could be done in Syria or Yemen, targeting U.S forces and its allies in the area. By using Hezbollah or Hamas, Tehran would even be able to instigate a full-scale regional war, forcing Israel to take part in the conflict. Related: China Set To Miss Shale Gas Production Target By A Mile

Proxy wars in several countries in the Middle East could have a detrimental effect on global oil and gas markets. Any disruption to oil and gas flows cannot be countered by increased OPEC output or even U.S. shale oil. The market may seem well supplied, and inventories are still at relatively high levels, but this reality could soon change.

Until now, the market is behaving like an ostrich. By putting its head under the surface, and convincing itself that there is enough crude supply, or that ‘turning on the taps could rapidly add the missing barrels. The looming war in the Persian Gulf is only assessed on the merits of a US military invasion of Iran, which is unlikely to happen.

If the Iranian regime realizes it is heading for the brink, its proxies will do its bidding. On the global oil market, volumes are no longer the only factor of importance. It is quality and crude grades. These two factors are not being recognized, and it seems that traders and analysts believe Trump’s version of reality at present. OPEC’s spare production capacity is not sufficient, as Iran and Venezuelan heavy crudes are in short supply.

The U.S. is not able to substitute any of this in the short-to-mid-term. When the market hits the brick wall at the end of this year, this quality problem, in combination with increased instability in the Middle East, will not only create a nightmare scenario for consumers but could also push crude oil above the current $70-85 per barrel range. Proxy wars and sanctions could create the perfect storm for oil. A possible spike to $90 seems within reach.

By Cyril Widdershoven for Oilprice.com

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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… More

Comments

  • Terry D - 12th May 2019 at 7:51pm:
    And Canada (Alberta to be specific) sitting on huge amounts of HEAVY oil and can not get it to market do to the worst provincial and federal governments in the history of this province and country.
  • james farmer - 13th May 2019 at 1:35am:
    Mr.President, you may believe all men are created equal, but you are such a fool to believe all oils were created equal. All oil traders, if you understand what I am talking about here, this will be the greatest trade in your life time.
  • Mamdouh Salameh - 13th May 2019 at 2:50am:
    China, India and Turkey don’t recognize US sanctions against Iran’s crude oil exports and therefore will never stop buying them no matter what Washington says or does.

    Moreover, China is capable of nullifying sanctions against Iran at will by buying the entire exports of Iranian oil estimated at 2.125 million barrels a day (mbd) and paying for them in petro-yuan particularly if the trade talks with the United States collapse.

    With John Bolton, President Trump’s national security adviser and a fanatic neo- conservative to boot and also a plotter of the invasion of Iraq, a Middle East proxy war is possible.

    US sanctions against Iran have so far failed to adversely impact on Iranian oil exports. Furthermore, the Iran zero exports option is unattainable. If, however, the United States means by it intercepting Iranian crude shipments and preventing them from crossing the Strait of Hormuz, then this means war with Iran engulfing the whole Gulf region. In such a situation, a mining of the Strait of Hormuz and even attacks on Ras Tannura, Saudi Arabia’s huge oil terminal in the Gulf and the world’s biggest and other oil infrastructures would be targeted by Iran. This could engulf the region in a destructive war that could be very damaging for countries of the Gulf and also Israel. US forces in Iraq and everywhere in the Gulf along with Israel will be also targeted adversely affecting oil prices and supplies.

    US claims that Iran or its proxies are planning to attack oil infrastructure and commercial shipping including oil tankers in and around the Persian Gulf is pure fiction and is part of a psychological warfare being waged on Iran by the United States.

    Iran will never haphazardly try to close the Strait of Hormuz but it is on record threatening that if its oil imports were prevented from passing the Strait of Hormuz, then it will stop Gulf oil exports passing through the Strait.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Hasan Amini - 14th May 2019 at 11:35am:
    I enjoyed reading this article very much. The style is impeccable because I think it abides very well with the principles of journalistic writing. I'd like to thank Dr Widdershoven for this characteristic in his informative article. The comments left by the readers are great, as well especially when it is realized that they are written by people who enjoy expertise in the field. I'm not an expert but just a lay person that has just started reading oilprice.com. What I learned from this article was that Mr Trump made a hasty decision when he left the treaty arrived at by Iran and the world powers just a few years ago. A superpower, once I was reading, should behave in a manner that could have some logical control over everybody so that a balance could be experienced on different layers of life and all nations could live in harmony with one another under the umbrella held by the superpower. Turning over the table for irrational reasons would not do good to anybody. Mr Trump, from my point of view, has made a mistake; he has turned over the table at which everybody was sitting for future talks and dialogues. And what would result from this? The suffering and misery of all those people who have always wished for just a peaceful life without going under pressures coming from sources of irrationality and injustice.
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