Oil and trouble in the Gulf
Gulf producers learn that regional instability no longer guarantees high oil prices
The September attacks on Saudi Aramco’s Abqaiq processing plant and Khurais oil field—which took out about half the kingdom’s production—was the most serious in a string of destabilising developments in the Middle East during the summer and early autumn: the seizure of oil tankers; attacks on tankers; the sacking of the Saudi oil minister; riots in Iraq and Egypt; an acceleration of Iranian uranium enrichment; the Turkish invasion of northern Syria.
Under normal circumstances, any one of these events could have triggered a prolonged spike in oil prices. After the Abqaiq/Khurais attacks, the price rose by about 20pc, but not for long. The average Brent spot price for that week was just over $65.50/bl—at the higher end, admittedly, but still within July-October’s $57-66/bl price band. There are “two reasons for prices retracing so quickly”, says Bill Farren-Price, director at Calgary-based analyst RS Energy Group. “Firstly, a dominant weak global economy/recession narrative that outweighs geopolitics. And, secondly, the oversupply picture which, despite a falling US rig count, still makes the first half of 2020 look very sloppy.”
For Saudi Arabia, hoping for higher prices to boost the planned initial public offering (IPO) of shares in state-owned Saudi Aramco, the past few months have been trying. Weeks of rising tension in the standoff with Iran diverted attention away from Vision 2030, Crown Prince Mohammed bin Salman’s initiative to wean the kingdom off oil. Then, in the aftermath of the September attacks, came the realisation that any part of the country’s energy infrastructure might be vulnerable to a similar assault.
But perhaps the biggest surprise of all was seeing how the global oil market reacted to the Middle East’s tumultuous months. Gulf producers as a whole have had to realise that their oil is no longer that on which the world totally depends. “Saudi Arabia and its Opec counterparts understand perfectly well that, without the Opec+ cuts, oil prices would be a step lower,” says Farren-Price. “So, despite all the security risk, the outlook remains weak.”
Gulf producers had to realise that their oil is no longer that on which the world totally depends
The reputation of Saudi Arabia, and the Mid-East Gulf region as a whole, as a totally reliable source of energy is also damaged by recent events. “The tanker wars and the September attacks,” adds Farren-Price, “are not a good advertisement for Middle East oil. They remind customers and the market at large that this is an unstable part of the world and that oil facilities are vulnerable. But the speed of the Saudi recovery is also important—no other company could have achieved such a turnaround.”
The evolving role of global powers—with President Donald Trump making clear that the United States wants out, and President Vladimir Putin indicating that Russia is happy to fill the gap— is another key feature of the past few months. For the US’ Gulf allies this is a disturbing development. While Saudi Arabia and the United Arab Emirates, which recently hosted Putin, welcome closer ties with Moscow as a balance to reliance on an increasingly quixotic US, they are not enamoured with all Russian policies in the Middle East—particularly in Syria.
“The Russians are singlehandedly perpetuating a [Syrian] government that is incapable of either governing properly or creating a political consensus that would lend it at least minimal legitimacy,” says Faysal Itani, senior fellow at the Atlantic Council think tank. “This will doom the place to perpetual instability, with all the negative implications for regional stability.”
With the war in Syria entering a new phase and the Iran nuclear crisis unresolved, a tense summer in the Gulf looks like being followed by an equally uneasy winter.