Oil: Under fire...and under-priced?

In the light of ongoing and foreseeable events around the Arabian peninsula, last week’s sell-off of oil looks perverse.

"Oil traders, distracted for now by a brewing trade war between the US and China, are at risk of growing complacent. But it is unlikely they will be able to discount Saudi Arabia’s conflict in Yemen much longer.”

David Sheppard, Financial Times, 5 April 2018

The past week has seen the price of Brent crude fall by over US$2 (or 3 percent) to around US$67 per barrel. In other circumstances, movement on this fairly modest scale would likely be relatively unremarkable. However, coming, as it did, at a time when Houthi rebels in Yemen seem to have decided to target Saudi Arabia’s oil-related assets, it is hard to conclude other than that Mr Sheppard is correct in asserting in this recent FT article (subscriber access only) that oil traders are either complacent or simply not paying attention.

First, the Saudi-led coalition which has been fighting against the Houthi since 2015, claimed on 3 April, that a KSA tanker had been hit by an anti-ship missile in international waters in the Red Sea. Although the tanker reportedly suffered only minor damage, if this is a sign of things to come it is important to keep firmly in mind that over 3 million barrels of oil per day pass through Yemen’s Bab el-Mandab shipping channel (pictured).

Then on 4 April, Saudi Arabia claimed to have intercepted a ballistic missile aimed at Saudi Aramco storage tanks in the port city of Jizan.

Making the slide in the oil price seem doubly perverse, to my mind, is the fact that it came immediately before President Donald Trump’s National Security Adviser, HR McMaster, handed over his portfolio to John Bolton (on 6 April), bearing in mind that the announcement of the latter’s appointment added around three bucks to the price per barrel based on perceived political risk.

Consequently, I doubt that the recent down-tick will be sustained for long, even if last week’s two reported attacks prove to be one-offs or if similar attacks occur in future but also fail to inflict serious damage. After all, these incidents (coupled with the reported use of chemical weapons by Iran ally Bashar al-Assad this weekend) are only likely to make Mr Trump, no doubt spurred on by the Saudis, even more minded not to sign the Iran nuclear deal sanctions waiver next month when it comes up for renewal. As I have opined in previous articles, although it is not clear how Tehran will respond, a rise in tensions in the Gulf is almost bound to ensue, putting renewed upward pressure on the oil price irrespective of further Houthi actions.

As Mr Sheppard concludes:

“Oil traders should be paying attention”.

Alastair Newton