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Oil price volatile after cargo ships sabotaged in UAE waters

May 14, 2019
4 min read
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Four commercial ships in UAE territorial waters in the Gulf of Oman were sabotaged, near of the key oil transport routes amid regional tensions, sending Brent crude to hit a two-week high on Monday.

GCC Secretary General Dr Abdullatif bin Rashid Al Zayani, “denounced the act of sabotage against four ships near UAE territorial waters,” describing it as a “serious escalation” that is undermining the safety of maritime traffic in the region, according to a statement on UAE state news agency WAM.

Two Saudi oil tankers were targeted early Sunday, one of which was on its way to be loaded with Saudi crude oil from the port of Ras Tanura for delivery to Saudi Aramco's U.S. customers, Saudi Energy Minister Khalid Al-Falih said on Saudi Press Agency, adding that the attack caused significant damage to the structures of the two vessels.

"Such irresponsible acts will increase tension and conflicts in the region and expose its peoples to great danger,” Al Zayani said about the sabotaged ships, east of Fujairah.

The incident resulted in no injuries or fatalities on board the vessels and that there had been no spillage of harmful chemicals or fuel, UAE’s Ministry of Foreign Affairs and International Cooperation said. It also negated media reports on Sunday about a fire in the Port of Fujairah, saying that operations within the port were under way as normal, without any interruption.

The UAE did not give details of the incident but asked the international community to stop any parties “attempting to undermine maritime traffic safety and security,” WAM said.

Supply disruptions in the Middle East on top of an already tight crude market could send oil prices violently upward, according to Rystad Energy. Brent has steadied at $70.48 per barrel by 0700 GMT on Tuesday after hitting a two-week high of $72.53 per barrel on Monday. 

“In the short term, the perceived risk of supply disruptions from the area will only add to the premium of short-dated oil contracts compared to deferred contracts on the futures curve, which are already trading at a high premium,” Bjørnar Tonhaugen, head of oil market research at Rystad Energy said.

The tightness in prompt supplies is caused by declines in production from Iran and Venezuela, along with ongoing OPEC cuts, outages in Russia owing to the Urals contamination, maintenance in Kazakhstan, plus planned maintenance in the North Sea during the summer months.

“The oil market is reacting today not because the physical market suddenly has lost more oil supplies, but because of risks that the market may lose more oil in the coming weeks and months given the heightened risk of supply disruptions from the critical Persian Gulf region. Raising tensions even higher, news flows suggest the latest incident might be related to the conflict between Iran and the US, which puts the Strait of Hormuz in play,” Tonhaugen said.

The incident occurred near the Strait of Hormuz, the world’s most important oil artery. Around 40 per cent of the world’s traded crude oil is transported through the waterway between Iran to the north and UAE/Oman to the south. Approximately 90 per cent of Saudi Arabian crude exports and 75 per cent of Iraqi exports pass through this shipping lane, in addition to all oil exports from Iran, Kuwait and Bahrain.

The US announced last month that buyers of Iranian oil must stop purchases by 1 May 2019 or face sanctions. The termination of the so-called Iran sanction waivers program prompted Iran to renew its threat to close the Strait of Hormuz.

“Iran has repeatedly threatened to ‘block’ the strait as a ‘weapon’, but due to the importance of the waterway for the global economy and the price of oil, the strait is also protected by the US Navy’s Fifth Fleet and other allies,” Tonhaugen remarked. “Needless to say, if the strait was to be blocked or disrupted, even only for a short period of time, oil prices would react violently upwards. There are limited bypass options to export crude, although Saudi Arabia and the UAE do have limited pipeline capacity to shift some crude exports to the Red Sea or the Gulf of Oman.”

However, any disruption to the flow of oil through the Strait of Hormuz would have unknown consequences for the stability in the region. The risk of sparking an escalating conflict implies that the threats being expressed lately are probably of the rhetorical kind, with less likelihood of the “oil weapon” actually being set in motion.

Meanwhile, Iranian Foreign Ministry spokesman Abbas Mousavi expressed concern about sabotaging the oil tankers, a statement on IRNA said.

He also warned against any conspiracy orchestrated by ill-wishers to undermine stability and security in the region.

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