Oil prices jumped on Monday on news that two Saudi oil tankers were supposedly attacked near the Persian Gulf, raising fears that supply may be at risk.
Two Saudi oil tankers were reportedly hit with explosions over the weekend near the Strait of Hormuz, according to Saudi oil minister Khalid al-Falih. While the exact cause remains unknown, al-Falih said it was an act of sabotage. The attacks occurred in the Gulf of Oman, and resulted in “significant damage to the structures of the two vessels,” al-Falih said.
The incident comes against a backdrop of rising U.S.-Iran tension, although there was no evidence of Iranian involvement at this point. A Saudi official told the Wall Street Journal that while the attackers are unknown, they doubted that Iran was behind it because of the risk of setting off a larger conflict. An American official agreed, telling the WSJ: “It would be very clumsy from the Iranians.”
Iranian officials denounced the act of sabotage. “Such incidents have negative impact on maritime transportation security,” a spokesman for Iran’s foreign ministry said, before adding everyone should be “vigilant against destabilizing plots of foreign agents.”
Nevertheless, oil prices shot up on Monday. The price increase was especially notable since the U.S.-China trade war sent global financial markets into a downward spiral at the same time. Even as the S&P 500 was down more than 2 percent during midday trading on Monday, Brent crude was up 1.5 percent.
“Not even the decision by the US to slam 25% tariffs on all goods from China has been able to push oil lower,” Bjarne Schieldrop, chief commodities analyst at SEB, wrote in a statement. “The oil market is getting very bullish signals from spot prices at the moment which are countering the growth blues from the escalating US – China trade war.”
As Schieldrop notes, the front end of the Brent futures curve has moved into backwardation, a clear sign that the market is experiencing tightness. Outages in Venezuela, Iran and some “supply disturbances” related to pipeline outages in Nigeria and contamination in Russian oil are holding the physical market “in a tight grip,” Schieldrop said.
The Strait of Hormuz also has a unique ability to scare oil traders. Roughly 30 percent of the global seaborne crude oil trade passes through the Strait, as well as a third of the global LNG trade, with exports coming from Saudi Arabia, Iran, Kuwait, Bahrain, the UAE and Qatar. Iran has repeatedly threatened to interrupt oil flows through the narrow strait if it is not allowed to export oil, though such threats have consistently proven to be bluster.
One of the ships that suffered damage was heading for the UAE port of Fujairah, which, crucially, is situated on the UAE’s east coast, outside of the Strait of Hormuz. It has the advantage of allowing ships to load up and drop off crude oil without needing to pass through Hormuz at all.
The bottom line is that oil markets are tight enough that such an incident – which won’t have a significant effect on supply – rattled traders. In the past few years, supply was ample enough that flare ups such as the latest incident barely moved the needle. But minor outages can have big impacts on prices when supply is tight. “The oil market is reacting very sensitively to supply disruption risks considering the market is already tight,” said Giovanni Staunovo, an analyst at UBS Group AG, according to Bloomberg. “Any additional disruption would further tighten the oil market.”
Any significant outage would come on top of declining output in Iran and Venezuela. It is unclear how OPEC+ will react next month in Vienna, but for now, they are sitting tight and letting the supply curbs prop up prices.
U.S. shale production may have slowed but it is still expected to grow. On Monday, the EIA released new data with estimates for shale growth in June, but “the increase is unlikely to be sufficient to plug the supply gap caused by OPEC,” Commerzbank said in a note ahead of the EIA publication.