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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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The War That Would Transform Oil Markets

Oil

A fire erupted at an oil pipeline connecting Bahrain and Saudi Arabia, and the two Arab allies are pointing the finger at Tehran. Iranian officials denied any involvement, but the incident is the latest in a series of events that are intensifying conflict between the Middle Eastern rivals.

The oil pipeline resumed operations in a matter of hours, but the war of words is heating up. Bahrain’s Foreign Minister Khalid Al-Khalifa said on Twitter that the “attempt to bomb the Saudi-Bahraini oil pipeline is a dangerous Iranian escalation that aims to scare citizens and hurt the global oil industry.” A spokesperson for Iran fired back, saying that the Bahrainis “need to know that the era for lies and childish finger-pointing is over.”

The incident comes only days after a missile was fired from Yemen into Saudi Arabia, which the Saudis pinned on Iran.

Meanwhile, a web of intrigue has enveloped Lebanon, the small country in which all the regional powers hope to exert their influence. Earlier this month, Lebanese Prime Minister Saad al-Hariri resigned and decamped to Saudi Arabia, blaming Iran and Hezbollah for putting his life and his family’s safety at risk.

But, Hezbollah said Hariri is actually being held captive by the Saudis. Riyadh, in turn, warned Saudi nationals to leave Lebanon. Israeli leaders have said they would bomb Lebanon back to the Stone Age. Related: U.S. Congress Slashes Support For Renewables And EVs

To further confuse matters, Hariri said he could withdraw his resignation and continue on as prime minister, so long as Hezbollah quit interfering in regional conflicts. "I am not against Hezbollah as a party; I have a problem with Hezbollah destroying the country," he said.

The bizarre events, many believe, are part of a broader proxy battle between Iran and Saudi Arabia—a conflict that only seems to be heating up. Crown Prince Mohammad bin Salman’s internal purge of rival members of the Saudi royal family has also raised tensions. MBS, as he has become known, is pursuing an aggressive foreign policy that is often downplayed in the western press, as news outlets tend to cast a positive light on his economic reform efforts.

However, MBS is the principal driver in the disastrous war in Yemen, the destabilizing blockade of Qatar, and the heightened tensions with Iran. With his domestic opponents out of the way, it seems he has an iron grip over the Saudi government right now. Many oil analysts view this as slightly positive for oil, as an extension of the OPEC agreement seems more likely with MBS in total control.

But the upside risk to prices is even greater if MBS’s belligerence leads to a more serious clash with Iran.

Middle East conflicts tend to send oil prices in one direction: up. In recent weeks and months, we’ve seen a return of Middle East geopolitical tension, such as the Kurdish independence referendum and subsequent seizure of Kirkuk oil fields by the Iraqi government. Also, instability in Nigeria and Libya have led to temporary oil supply interruptions. To date, these events have added some upward pressure on oil prices, but the markets have largely shrugged off those flashpoints.

A Saudi-Iranian struggle is another matter.

“Most of the political risk has been smaller-scale,” Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg. “But when you start talking Saudi Arabia and Iran, that gets people’s animal spirits flowing.” Related: Is Saudi Arabia Lying about Its Oil Inventories?

Hedge funds and other money managers increased their bullish bets on crude oil to a fresh record last week. The Iran-Saudi Arabia clash, which is playing out in proxy battles in Yemen and Lebanon, could widen into something much more serious. While the likelihood of such a hot war breaking out remains remote, it no longer seems impossible.

A few months ago, Brent trading in the mid-$60s would have been considered unsustainable by most oil analysts. Now Brent seems to be on solid footing, and Tehran and Riyadh are on the verge of pushing things even higher.

“I wouldn’t be surprised to continue seeing this kind of movement as long as we’re not getting any negative news from the OPEC members until the meeting,” Ashley Petersen, lead oil analyst at Stratas Advisors, said in a Bloomberg interview.

As it happens, OPEC just announced that its collective output fell in October by 151,000 bpd, with drop offs in Iraq, Nigeria, Venezuela, Algeria and Iran. The “high conformity levels” with the production limits, combined with heightened tension in the Middle East, could put a near-term floor beneath crude prices.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Ted Klampit on November 13 2017 said:
    I doubt it was repaired in a a couple of hours.

    The word on the street is the 7.3 quake in Iran-Iraq northern boarder area damaged much of the oil pipeline in the area.

    Iran is not reported much of anything. Yesterday they reported 2 deaths related to the giant 7.3 quake.
  • Bill Simpson on November 13 2017 said:
    The Saudis just called an emergency meeting of the Arab League. Guess what they will discuss. It starts with an I, and ends with an n.
  • Fred Vogel on November 14 2017 said:
    It seems the leaders of the Middle East will "do whatever it takes" (as promised in Moscow) to keep oil prices high. This includes having a war, sabotaging each others installations, cheating with the amount of oil in storage, deposing leaders in neighboring countries.

    Other producers cut costs, become more effective and profitable at lower cost, and compete fairly. Opec is in a different league. Their attempts to raise prices will just hasten their race to the bottom, and irrelevance, as renewables and more efficient oil production gains strength.
  • Gary Novak on November 14 2017 said:
    Cunningham cites a Bloomberg article which reports that the Saudis and Iranians are blaming each other for various incidents (oil pipeline fire, Yemeni missile fired at Saudi Arabia, etc). But that article does not assign blame for the increasing tensions. Cunningham does: It is the Saudi Crown Prince MBS who is the principal driver of the increasing tensions with Iran. It is MBS who is pursuing an aggressive foreign policy. He is not standing up to Iranian aggression; he is the aggressor. Cunningham says we don't hear that in the Western press, which sweeps the truth under the rug because it likes Saudi economic reform. Presumably one has to read the Eastern press (Tehran) to find the truth. Is Cunningham offering a report or an editorial?
  • Bruce Hopkins on November 14 2017 said:
    For YEARS I've heard that we here, in the U.S. have VAST oil resources that we haven't tapped b/c the Middle East oil has been so cheap. Maybe *now* is the time to start drilling!

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