US-Iran tensions escalate with tanker attacks in Gulf of Oman

Brent crude oil prices hovered under $65/bbl on the London market in late July despite geopolitical risks, especially US-Iran tensions, that typically would support higher prices. But oil investors appeared more focused on concerns about world oil supply.

US sanctions on Venezuela and Iran have removed more than 1.5 million b/d of oil. The Organization of Petroleum Exporting Countries in early July extended supply-cut targets into 2020.

The Center for Strategic & International Studies in Washington, DC, issued a July 22 research note saying at least seven oil tankers have been attacked in and around the Strait of Hormuz in 7 weeks.

Frank Verrastro of CSIS said US and Iranian officials “both claim to have documented opposing drone assaults, and security has been bolstered in an apparent attempt to discourage further maritime interference.”

Verrastro said, “Iran has clearly signaled both its intent and ability to temporarily disrupt regional oil and energy shipments wherever and whenever it wishes. That strategy presumes, however, that such engagements are limited both in scope and duration as neither Iran, its neighbors, nor major global powers want a direct or large-scale military confrontation.”

Moty Kuperberg, director of Oil & Gas Dynamic Shipping in Haifa, Israel, said military escorts are needed to safeguard oil vessels moving through troubled Middle Eastern straits and seaways.

“There is large enough naval force from the relevant countries that send their oil tankers to the Persian Gulf,” Kuperberg said. He said it’s unclear if US, UK, Japan, India, China, France, or Saudi Arabia will take the role of crisis management leader.

“Against some regular voices that fear from an oil shock, it should be quite clear to any consumer of Arabian Gulf oil and gas, and to any trader, that prices will stay stable as they did in the last couple months,” Kuperberg said in an e-mail to OGJ.

“Brent at low $60s/bbl and [West Texas Intermediate] below the $60/bbl is a good sign for the market even under the shadow of continuous threats in the Persian Gulf,” Kuperberg said. “Nevertheless, a worse-case scenario may still be around the corner, which the market must enter with a clear attitude not to let Brent climb over $70/bbl,” Kuperberg said.

Helima Croft, global heard of commodity strategy for RBC Capital Markets LLC, said a series of provocations involving various vessels and the Islamic Revolutionary Guards Corps naval forces could push the Middle East “closer to a full-blown crisis.”

Croft said, “We believe that oil prices have become a broken barometer for gauging the rising pressure in the region and are now much more of a lagging risk indicator. Consumed with concerns about trade wars and demand destruction, many market participants view the attacks in the Straits of Hormuz as geopolitical background noise that will not rise to the level of a major supply disruption or a military conflict.”

Croft suggests oil market participants “could soon witness the test case for whether $80/bbl Brent has become the new geopolitical risk ceiling price.”

The $80/bbl Brent potentially could replace $100/bbl as the new geopolitical risk ceiling price, Croft suggested.

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