Assessing the Impact of the Persian Gulf Crisis Shifting West
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Assessing the Impact of the Persian Gulf Crisis Shifting West

by | published October 11th, 2019

Following the attacks on Saudi oil assets last month, I noted that sources in my network were indicating that the next regional focus for conflict would likely be shifting.

This shift would move from the Strait of Hormuz in the east to areas west, to either additional Saudi targets inland or Red Sea shipping routes leading up to the Suez Canal.

Well, the latter happened earlier this morning some sixty miles off of coast from the Saudi city of Jeddah.

The Iranian tanker Sabity was hit by two missiles some twenty minutes apart.

The damage resulted in oil spills but no injuries to the crew, according to a statement from the National Iranian Oil Company. My Saudi contacts have not responded to my requests for comment, while those at the National Iranian Oil Company (NIOC) have expressed an unusual restraint.

This has all the markings of both sides recognizing that a point has been reached beyond which events take on a trajectory of their own. Tehran has said it will respond, but Iranian authorities have said nothing else.

As expected, the initial result was a spike in both Brent and WTI, the two main crude oil benchmark rates. Brent usually moves up quickest in such situations as it is the primary yardstick for determining the contract prices for consignments in actual global trade. As such, it registers a greater sensitivity to geopolitics.

Once again, in what has become a characteristic pattern, an initial rise in prices (this time some 2%) ebbs after the market regards an episode as a “one off.” While all involved acknowledge the situation as an accelerating crisis, the view remains that the past several months in the region has comprised of an intermittent, strangely unconnected, series of insular events.

The prevailing opinion among pundits is that such isolated attacks are unlikely to start a war in the Middle East.

Yet in my experience, widening conflicts have begun over less…

One Result of These Attacks is a Hectic Travel Schedule

Personally, my travel schedule is not going to get any easier.

This morning’s attack took place only a day after I returned from my latest meeting of international investors and policy makers, this one taking place in Canada. And it certainly does add some urgency to my next meeting – a gathering in two weeks of international oil and risk assessment experts, market makers, and policy advisors to take place close by the London Stock Market in the shadow of St. Paul’s.

That one is to assess the impact on energy shipping and transport in the Persian Gulf and another flashpoint – the South China Sea.

If recent events have conveyed no other message, it is this: the main crude oil delivery routes worldwide are coming under siege.

As I write this, both Brent and WTI are again stabilizing, up but only modestly so.

Middle Eastern Politics at Their Finest

There is no confirmation over who bears responsibility for this morning’s attack.

But it is instructive to remember that the Red Sea theater of operations leaves both Saudi Arabia and Iran more vulnerable than an attack in the Persian Gulf or the Gulf of Oman – the two bodies of water connected by the strategic Strait of Hormuz.

In the east, each has a preponderance of its military presence and land bases from which to launch strikes. The Saudis have installations near Jeddah, but this is also the entry way to the two holiest cities in Islam – Mecca and Medina. Iran, on the other hand, will find itself overextended in supporting its tanker traffic routes in the Red Sea.

The Red Sea also puts the oil trade of both countries within range of both the belligerents in Yemen’s ongoing civil war and militant elements in the horn of Africa.

And then there are the Israeli oil delivery interest north of today’s attack. That’s the Gulf of Aqaba juxtaposed at the confluence of the Red Sea and the Gulf of Suez.

Any further movement of attacks up the coast runs the risk of drawing in the one regional country whose involvement is certain to escalate conflict.

As I have observed several times over the course of this unfolding crisis, it is not an impending increase in attacks so much as the uncertainty factor that most disturbs oil traders. Not knowing what is happening next is usually a recipe for a higher pricing floor.

Remember, in such times the price of a futures contract is more often set using the anticipated highest cost of the next available barrel. Risk to the high side becomes a more important offset concern.

Sincerely,

Kent

P.S. As I mentioned above, one flashpoint in the global energy world is the South China Sea. And it’s more than just a shipping route. It’s also home to some of the most sophisticated military technology in existence. Much of it belongs to the Chinese, and much of that is aimed right at the U.S. Both sides in the long-standing territorial conflict in these tension-filled waters have been upping the aggression over the past few years. But these days it’s gotten hotter. Click here to learn how the U.S. can beat the Chinese at their own game…

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