Hightened Tensions In Gulf Of Oman Creates Volatile Market For Oil And Gas

After two more tankers were attacked in the Gulf of Oman earlier this week, fears are rising that the growing tension between the United States and Iran will escalate. Hard facts are elusive as always in that region of the world with the usual finger pointing and chest thumping coming from all sides. But coming just a month after four oil tankers were attacked just off the coast of the United Arab Emirates the situation is increasingly volatile.

The latest incidents in one of the world’s busiest oil routes involved the Norwegian-owned Front Altair and the Japanese-owned Kokuka Courageous with rumors off mines and even torpedoes being given voice in the aftermath.

The two vessels affected were transiting through international waters, close to Iran and the Strait of Hormuz, carrying what sources have said was CPC naphtha and methanol respectively. “This alleged attack comes during an already tense situation after we saw four other tankers attacked just a few weeks ago, off the coast of UAE,” Sophie Udubasceanu, global crude oil editor, ICIS, says. “The markets have also seen a drone attack on a Saudi pipeline just days later, further fuelling tensions in the Middle East. It is these concerns that have been transposing into the global oil market and causing a spike in oil futures.”

Rising tension

Tensions in the region are already high and there is not much clarity behind the culprit yet. “Tensions translate into uncertainty, and uncertainty is what makes oil volatile,” Udubasceanu adds. “As speculation is mounting, this incident raises questions over the security of the area, with the Strait of Hormuz playing host for around 30% of vessels carrying oil at sea. This is a strategic point in the region. Fears of a tighter supply will be driving oil prices up until the market is satisfied that the threat has minimized or has disappeared.”

It is difficult to pinpoint exactly who stands to benefit from the rising tension in the wake of the attacks. Anyone can point out that higher oil prices mean higher revenue for oil producing countries, but it remains to be seen if this is something that will be short-lived or if it will have a long-lasting impact on the market.

Market reaction

In the short-term, prices have already responded sharply, gaining ground during European trading. Brent oil futures were up $2.00/bbl compared to Wednesday (June 12)’s close. “Oil is likely to continue to respond to this story as it develops,” Udubasceanu says. “I expect the impact to continue over the weekend as we see further responses from officials. The Iranian foreign minister Zarif tweeted about the incident and calling it ‘suspicious’. We are bound to see other oil producing nations responding to the news. Prices may stay locked in a bullish trend until we see a development in the U.S.-China trade war, which would shift attention and trigger some downwards pressure; or until another development emerges.”

Geopolitically instability

After the significant drop in oil prices in recent sessions, the tanker explosion in the Gulf of Oman has provided a reminder that geopolitical instability remains, which in turn has seen rising risk. “More importantly this attack has taken place near the world’s major chokepoint, the Strait of Hormuz,” Justin McQueen, analyst at DailyFX adds.

“The key focus, for now, is who carried out the attack? Naturally, the initial blame appears to be moving in the direction of Iran, given the rising tensions between Tehran and the U.S. following the latter’s decision to place sanctions on Iran’s oil and petrochemical sector. If indeed Iran were responsible, a further escalation in geopolitical tensions in the Middle East could raise the risk of oil price spikes in the future amid the uncertainty surrounding potential supply disruptions.

Logistical challenges

According to Alejandro Perez, VHR Global Recruitment energy and marine team explains although we have seen an immediate spike in the price of oil in the wake of the attack, it is likely just to be an isolated incident so will not have a long-term impact. However, there could be a ripple effect if oil companies decide the Strait is too dangerous to travel through.

“If this happens, they would likely have to find other methods of transport, as the Strait is a natural chokepoint without alternative trade routes by sea,” he explains. “Almost a third of all marine-transported oil moves through the Strait, so this would hugely disrupt day-to-day trade, and increase travel times for massive quantities of oil. It’s possible we’ll see kneejerk reactions in the coming days, certainly in security, but at this stage, it’s too early to tell if this will have wider repercussions for the industry as a whole.”

Shaky markets

Mihir Kapadia, CEO of Sun Global Investments explains that investors will be keeping a keen eye on the developments in the Gulf of Oman as tensions in the Middle-East have been rising since President Trump withdrew from the Iran deal last year, and this will undoubtedly impact oil prices in the coming days as more developments come in. “Although U.S. National Security Adviser John Bolton has accused Iran of a similar incident before, the country has distanced itself from the attacks. From this, the biggest concern will be a retaliation which could leave markets looking shaky in the meantime, with Iran potentially being met with more severe sanctions which could really affect its oil output and economy if found guilty.”
Source: Forbes