By Tim Daiss
Saudi Arabia, the world’s largest oil exporter, and de facto OPEC leader, is trying to calm global oil market jitters, and at least for now, it’s working. Saudi Arabia’s council of ministers said on Wednesday that the kingdom “will do everything in its power to prevent any war and its hand is always extended to peace,” adding the government was committed “to achieving balance in the (oil) market and working towards its stability on a sustainable basis.”
The statement also came less than a day after the American Petroleum Institute (API) said that U.S. crude stockpiles rose by 2.4 million barrels (bpd) last week, to 480.2 million barrels, compared with analysts’ expectations for a decrease of 599,000 barrels. Both developments put downward pressure on global oil prices in early Wednesday trading.
These developments also come as the OPEC+ group of producers, which includes production heavyweights Saudi Arabia and Russia, stick to their plan of removing 1.2 million bpd of oil from global markets. Due to the OPEC+ supply cut as well as geopolitical factors in Iran, Venezuela, and Libya, both global oil benchmarks are up around a third since the start of last year.
Saudi Arabia’s pledge to do everything in its power to prevent war has to be examined more closely. The kingdom would be expected to make such a statement, even as tensions between it and regional foe Iran heighten due to attacks on two oil tankers last week carrying Saudi oil as well as attacks on key oil pumping infrastructure in Saudi Arabia that Riyadh blames on Iranian influence. Tehran has denied it was behind the attacks which also come as Washington and the Islamic republic spar over sanctions and the U.S. military presence in the region, raising concerns about a potential U.S.-Iran conflict. Tensions between the U.S. and Iran have also reached perhaps their worst level since the 1979 Iranian Revolution that saw the overthrow of the Shah of Iran, a key U.S. ally, the seizure of the U.S. embassy in Tehran and the capture and detainment of 52 U.S. citizens and diplomats for 444 days from Nov. 4, 1979 to Jan. 20, 1981.
Moreover, Saudi Arabia’s assertion to avert war is not lining up with its actions, nor even its earlier rhetoric. At the end of last week, Riyadh also said it wanted to avert war in the region but stood ready to respond with “all strength and determination” after the attacks on Saudi oil assets, a senior official said, adding that the ball was now in Iran’s court.
Two case scenarios
At the end of the day, it remains to be seen how current tensions play out. Knowing that it can’t match the one-two knockout punch of U.S.-Saudi military alliance, it’s likely that Iran will continue to pick at the edges, using its proxies in the region, including Iraq and Yemen, to attack Saudi and U.S. interests. It’s a calculated risk on Tehran’s part which appears to not have an end game in mind. If Tehran continues to provoke both Washington and Riyadh, it is doing so against its own best interests which is to have crippling U.S. sanctions against its oil and other sectors removed. In other words, the best way to influence the hawkish Trump Administration is not by escalating tensions in the region.
The best-case scenario is that Iran will tone down both its rhetoric and its militarism in the region. Doing so would both calm global oil markets and help avoid a possible military confrontation. The worst-case scenario would see Iran continue its provocation of U.S. and Saudi interests, even initiating attacks on oil shipping in the strategic Strait of Hormuz. This would prompt a major military repose from Washington. Under the worst-case scenario, the strait of Hormuz, which sees around one third of all seaborne global oil supply pass, would be shut down, even if temporarily, sending cataclysmic shock waves through global oil markets. The impact on the price of oil would be anybody’s guess, but a prolonged hike in oil prices would send prices high enough to create demand destruction, the point at which consumers turn to alternative energy sources to avoid the high price of oil, as well as unsettling oil markets in ways not seen in decades.