Saudi Attacks Put Geopolitics Back in Focus

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Oil prices have been on a tear so far in 2021, riding high on Opec-plus supply cuts and hopes for a strong demand recovery as Covid-19 vaccinations ramp up. Geopolitics haven't factored much, but that could change suddenly, as demonstrated by this week's attacks on Saudi infrastructure in the oil-rich Eastern Province. While some argue that significant producer spare capacity -- up to 8 million barrels per day for Opec -- should tamp down concerns about geopolitical risk, much of that capacity is located in the volatile Middle East. As oil markets tighten further in coming months, geopolitical risk will likely weigh more heavily on traders' minds, potentially providing more bullish fodder for crude. The Mar. 7 attacks, claimed by Yemen's Iran-backed Houthi rebels, did not cause damage or loss to life and left Saudi oil production unaffected. But they prompted a brief spike in benchmark Brent to over $71 per barrel on Monday before retreating near $68-$69/bbl. The target of the attacks, Ras Tanura, is as high-profile as it can get for oil markets. It is home to Saudi Aramco's 6.5 million b/d export terminal, a 550,000 b/d refinery and a storage tank farm with combined capacity of 33 million barrels, among other facilities.The incident was reminiscent of the Houthi-claimed aerial strikes on Aramco's key Abqaiq processing facility and the giant Khurais oil field in September 2019 that briefly knocked out some 5.7 million b/d of crude production (PIW Sep.20'19). The fact that the drone and ballistic missile strikes were intercepted this time is encouraging. But it doesn't change the fact that both Saudi -- and other -- regional oil infrastructure remains vulnerable to unconventional, asymmetric warfare as drone and missile technology becomes more sophisticated and widely available (PIW Jan.17'20). Energy Intelligence previously predicted that tensions in the Mideast Gulf were set to rise in 2021 and highlighted US-Iran relations and the Yemen conflict as two of the key flash points to watch because of their potential to threaten critical infrastructure in the world's biggest oil-exporting region (EC Jan.8'21). Recent weeks have indeed seen a spike in regional tensions. In Iraq, US forces have come under increased attack from local, Iranian-backed militias, an Israeli vessel was targeted in the Gulf of Oman, and Saudi Arabia and the Houthis have stepped up their tit-for-tat attacks. It isn't clear yet whether the drones and missiles of this week's attack originated in Yemen or elsewhere, as some security experts have suggested. But they reflect both a recent escalation between Riyadh and the Houthis, who are advancing in Yemen's oil-rich Marib province, and the US and Iran posturing amid growing uncertainty over Washington's return to the Iran nuclear deal (PIW Dec.25'20). For now, the Yemen conflict represents the greater and more direct threat to Saudi oil assets as the wave of attacks from Yemen's Indian Ocean coast to the Saudi Red Sea port of Jeddah since last October has made painfully clear. Tehran, meanwhile, is utilizing its playbook of deploying regional provocations -- covertly or through proxies such as the Houthis -- to turn up the heat and advance its agenda. The risk of such a deliberate escalation is that it could provide the spark for a wider regional conflagration or kill off attempts to de-escalate conflict. It also means that any solution to the Yemen war will, one way or another, have to pass through Tehran. To be sure, crude prices are back to pre-pandemic levels, near their highest point since May 2019, after strong gains in the aftermath of last week's bullish Opec-plus meeting (PIW Mar.5'21). But the market's muted reaction to the attacks suggests geopolitics are an underappreciated risk. Concerns that Iran could close the Strait of Hormuz have helped push prices higher in the past, including in July 2008, when Brent hit a record-high $147/bbl. High spare capacity and lingering post-Covid demand concerns help explain some of the limited effect this week. But a price spike in the second quarter might still be in the cards since Opec-plus supplies may lag demand by a month or two even if the alliance chooses to ease cuts when it meets again on Apr. 1. More attacks on Mideast infrastructure could accelerate this trend.

Oil Demand, Oil Inventories, Oil Supply, Security Risk , Crude Oil
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