Iran proxy begins oil war that could drive prices to $250
Iran doesn’t look like it will take US sanctions (or a losing proxy war in Yemen) sitting down.
It looks likely Iran ordered Houthis to launch attacks on oil shipment routes, with the purpose of creating oil supply instability that will reverberate around the world, and drive prices to the roof.
Reuters reported today that Brent crude led oil prices higher, extending gains into a third day after Saudi Arabia suspended crude shipments through a strategic Red Sea shipping lane and as data showed U.S. inventories fell to a 3-1/2 year low.
Brent crude futures had risen 47 cents, or 0.6%, to $74.40 a barrel, after gaining 0.7% on Wednesday. US WTI crude futures were up 5 cents at $69.35 a barrel, after climbing more than 1% in the previous session.
“The announcement this morning that the Saudis have closed some shipping lanes in the Gulf because of rebel Houthi attacks also gives the bulls something to launch off,” Greg McKenna, chief market strategist at AxiTrader, told Reuters, also pointing to the drop in U.S. inventories.
“Saudi Arabia, the world’s biggest oil exporter, said on Thursday that it was “temporarily halting” all oil shipments through the strategic Red Sea shipping lane of Bab al-Mandeb after an attack on two big oil tankers by Yemen’s Iran-aligned Houthi movement,” said Reuters.
Iran’s President HassanRouhani had recently threatened to restrict shipments through bab al-Mandeb where over 5 million bpd cross on a daily basis.
The Bab al-Mandeb Strait, where the Red Sea meets the Gulf of Aden in the Arabian Sea, is only 20 km wide and most exports from the Gulf that transit the Suez Canal and the SUMED Pipeline pass through Bab al-Mandeb strait.
Responding to U.S. threats to bring Iran’s oil exports to a halt, Rouhani warned the United States on July 22 “not to play with the lion’s tail,” saying the U.S. would regret the consequences including “the closure of many straits”.
Saudi Energy Minister Khalid al-Falih said in a statement that the Houthis had attacked two Saudi Very Large Crude Carriers in the Red Sea on Wednesday morning, one of which sustained minimal damage.
“Saudi Arabia is temporarily halting all oil shipments through Bab al-Mandeb Strait immediately until the situation becomes clearer and the maritime transit through Bab al-Mandeb is safe,” the minister said.
Prices were also supported by official data showing U.S. crude oil inventories last week tumbled more than expected to their lowest level since 2015 as exports jumped and stocks at the Cushing hub dropped.
Crude inventories fell 6.1 million barrels in the week to July 20, compared with analyst expectations for a decrease of 2.3 million barrels, the EIA said on Wednesday.
According to the Financial Times, the suspension of oil shipments will slow the delivery of crude to two of Saudi’s key markets in Europe and North America “at a time when oil markets are already jittery due to tightening supplies and rising geopolitical risks.”
Each tanker, operated by the Saudi National Shipping Company, Bahri, was carrying 2 million barrels of crude produced by state energy giant Saudi Aramco when they were attacked by Houthi militia, according to Falih.
“A close US ally, Saudi Arabia has been raising production partly in response to calls from President Donald Trump to bring oil prices down, given the Iran sanctions,” said FT.
“Today’s attacks and Saudi announcement will also escalate tensions with Iran, which supports Houthi forces that have been increasingly threatening Saudi onshore and offshore oil assets and flows.”
The oil tanker attack follows a previous one in April by the Houthis off the Yemeni port of Hodeidah, and last week, the rebels claimed they had used a drone to attack a Saudi Aramco refinery in Riyadh, which Saudi Aramco denied saying it was an operational incident involving a limited fire in a storage container at the refinery.
Oil at $250
Reuters recently detailed how Iranian military operations could interrupt the oil supplies passing through the Strait of Hormuz: 18 million barrels of oil per day, or about 20% of the world’s supply.
This could lead to $200+ per barrel.
“‘Crude Oil Imports and National Security’ estimates -0.04 for the price elasticity of demand for crude oil. That is, if the quantity supplied to the market is cut by 10%, the price of oil will increase by 250%. With oil currently at $70 per barrel, a disruption in shipping in the Strait of Hormuz would lead to a $175 a barrel price increase, for a total of $245 per barrel, as shown in the graph,” said Forbes.
Graph courtesy of Forbes
“In the event of an Iranian blockade or war in the Strait of Hormuz, it is likely that Congress would again ban exports,” Forbes added, in which event consumers would face shortages and higher prices.
Oil at $45?
Oil could be back to $45 a barrel within 12 months, Citigroup’s commodities chief Ed Morse said in an interview with the Financial Post, noting that the bullish case for crude is based on a faulty analysis, OilPrice.com, an industry site, reports.
The top oil forecaster said that the capital efficiency and technological advancements that have improved oil recovery goes against the bullish scenario.
“The better the recovery rate, the more oil that can be produced on the cheap,” he said.
“The bulls make a mistake in estimating a global acceleration in total oil production decline when this acceleration will only take place in mature fields, which represent about 45-50 percent of the global total.”
He added that OPEC has the ability to consistently produce an average 35 million bpd over a 50-year period.
“Saudi Arabia can deliver 15 million bpd through its ports and has some 300 million barrels of crude in storage at home plus more abroad. In other words, the Kingdom could hypothetically deliver 15 million bpd, but it is only producing 10.8 million bpd,” he said.
Morse believes Brent could drop back to between US$45 a US$65 a barrel.