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Oil Prices Up As Iran Prepares For "All Out War"

An American or Saudi military…

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Cyril Widdershoven

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…

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Is A Full-Blown War In The Persian Gulf Inevitable?

Iran has been able to counter U.S. President Trump’s maximum pressure strategy by taking the challenge to the next level. With a big bang, the global oil market has been forced to rethink the current fundamentals and future prospects, as Saudi Arabia’s most critical infrastructure, the Al Abqaiq gas-oil separation plant (GOSP), was hit by drone strikes over the weekend.

After neglecting or outright ignoring increased geopolitical risks and new technological challenges, culprits have hit Abqaiq, which is not only the heart of the Saudi Aramco oil and gas infrastructure, but also the center of the global oil market. Until now, financial analysts have paid little attention to the geopolitical risk premium, and last week’s EIA/EIA and DNV reports continued to focus on the ‘bearish’ demand side of the market. Still, as fundamentals contrast analysis, geopolitical and security facts on the ground could now completely change the constellation. As long as hydrocarbons are the leading source of energy in the world, oil and gas infrastructure will remain a primary target for terrorists, cybercrime and state actors.  

Hardliners in Iran, Iraq, and Yemen, will be smiling, as the low-key and low-tech attack on Abqaiq has had a devastating result. With one stroke, market optimism about the removal of U.S. Hawk National Security Advisor Bolton and rumors about a Trump – Rouhani summit have evaporated. Despite warnings that the U.S.-Iran crisis is far from over, oil prices fell last week after U.S. President Trump fired Security Advisor John Bolton. Saturday’s attacks will not only disrupt de-escalation efforts but they have also fueled the anti-Iran front in the U.S. and abroad. Tehran backers, most probably IRGC leadership and proxies in Iraq, Yemen, and Lebanon, have been able to shock the oil market and have indirectly supported the Hawks in Washington and the Middle East. The Abqaiq attack, removing 5 million bpd of Saudi’s production, also removed doubts surrounding the so-called “Crying Wolf” approach of Washington and its Arab allies. The OPEC leader and its allies are under threat. U.S. Foreign Secretary Pompeo was quick to point the finger at Iran, but Tehran has not yet been caught red-handed.

The reactions of the Arab world are clear, full condemnation and preparation for military actions. At the same time, without the U.S., Egypt or Israel, no unilateral actions against Iran or proxies will be taken. What should be more worrying is that culprits were able, with relatively low technology arms, to bring down a major OPEC producer. Companies and governments should address these new types of threats, as the Abqaiq attack can be repeated without difficulty. Related: U.S. And Russia Battle It Out Over This Huge Iraqi Gas Field

For Saudi Arabia, the attack is and will be seen as an act of war. Other Gulf littoral states will without delay need to address and enforce the security of their critical infrastructure too. This weekend’s attack on Abqaiq, however, disrupted production beyond imagination.

In case the drones actually came from Yemen, the threat becomes even more pressing if a proxy force is willing and capable to hit another country’s main infrastructure.

Arab sources, however, already are supporting Washington’s claims that Abqaiq has been hit by missiles fired from the south of Iraq. And while Baghdad has denied such claims, it’s well known that most Shia militias are fully under control of Iran’s hardline IRGC forces.

Still, there is some time left to find solutions, as a military conflict with Iran will put other Arab countries unwillingly on the frontline. Without any other options left, Saudi Arabia, the UAE, Bahrain, and others will feel the direct reaction of Iran if military action is taken. Tehran has shown that its deck of cards is stronger at present and that it doesn’t shun military action. Statements by Trump, saying that the U.S. is 'locked and loaded' after Saudi Arabia attack, are most probably liked in certain Arab circles, but should not be seen as a green light for action. Trump’s tweet also included the statement that  the U.S. is “waiting to hear from the Kingdom [of Saudi Arabia] as to who they believe was the cause of this attack and under what terms we would proceed!” Related: Can Argentina's Shale Boom Survive?

The above is a direct statement giving Arab countries open security support but also gives room for further assessment. The conflict is heating up, and a senior commander from the IRGC warned that the Islamic republic was ready for “full-fledged” war. The same commander bluntly stated that his country could target all American bases and aircraft carriers within a distance of 2000km from Iran.

The prospect of a full-scale war in the region could, however, be constraint by an unexpected Saudi financial issue, the Aramco IPO. Even though Saudi Arabia is confronted by a “fait a compli” that it can’t ignore, Crown Prince Mohammed bin Salman will need to assess the damage and risks for his dream, the Aramco IPO. The success and time-schedule for the IPO is severely impacted by the Abqaiq crisis. International investors will be very wary to even offer to take a stake in Aramco as long as it cannot secure its most important assets. The prospect of a first 1 percent listing of the oil giant on the Saudi stock exchange Tadawul now could be put on hold. An Asian or U.S. listing also got more complicated due to the same reasons. Still, the IPO could at present be a war-blocking mechanism. Money makes the world go round’, and while it’s often a reason to start wars, this time money could be the only reason keeping Saudi Arabia and its allies from pushing the Gulf into a new regional war.

Riyadh could choose to delay a military reaction, and to focus on the IPO first. These choices are becoming increasingly difficult, and either way, Riyadh would be taking a huge risk. Any (un)wanted new escalation caused by Iranian forces or proxies could lead to a full-blown war. And currently, the Saudis simply do not have the best cards at hand.

By Cyril Widdershoven for Oilprice.com

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