Saudi denial of oil tankers entering a Yemeni port brought the Yemeni conflict to the fore in the oil sector. While the oil implications are negligible, the movement of the conflict towards the sea raises the potential for an accidental incident leading to direct conflict between the Saudi coalition and Iran, and the U.S.
This is more than a diplomatic row among GCC members. Perhaps emboldened by President Trump’s visit, Saudi Arabia and its allies have declared if you are with Iran (or specific radical Sunni groups), you are against us. This effort to delineate sides in the region cannot be easily reversed without substantial outside pressure. Expect a geopolitical premium to creep into energy prices as this dispute continues.
Notwithstanding the pageantry of the U.S. President visiting Saudi Arabia and the enthusiasm of young Iranians hailing their moderate President’s reelection, little changed in terms of the region’s political stability, the battle with ISIS or oil policy this weekend. The clearest signal from the weekend was the public and forceful assertion that the U.S. has allied itself with the Saudis versus Iran, which can only have stoked the age-old rivalry. This should not impact OPEC dealings this week as Iran’s production is near a top, but it is likely to have repercussions down the road when (and if) Iran’s productive capacity rises.
A victory on May 19 by the moderate incumbent, President Hassan Rouhani, would improve the outlook for Iran’s oil sector. Economic growth jumped after the nuclear deal and the lifting of the oil embargo, but Iran will have to pursue both higher production and higher prices to realize the economic recovery Rouhani has promised.
Trump Administration statements after the missile strike on Syria indicated a broad change in policy regarding the future of the Assad regime in Syria. Whether this is followed by other military, economic, or political actions remains to be seen. But, we have entered a new era in the Syrian civil war, which signals a subtle but important change in the new Cold War in the Middle East.
At the end of 2014, Saudi Arabia, with its OPEC partners, opted to lift crude oil production and
pursue greater market share in the face of rising U.S. shale production and the expected removal of
sanctions on Iran. By the end of 2015, crude oil prices had tumbled under $40, Saudi and Iraqi
production had risen by 1.5 million b/d, a nuclear deal was indeed struck, and Iran was gearing up to
raise exports. U.S. shale producers had worked furiously to cut costs and stay in business, but their
production had finally crested and was declining. Ironically, in this market of low oil prices and
falling U.S. production, the U.S. government lifted the ban on crude oil exports.
The conclusion of the Iran nuclear deal in 2015, by the Obama Administration, was indicative of a subtle
shift in U.S. positioning vis a vis the Saudi-Iranian rivalry for hegemony in the Gulf. In a reversal, President
Trump is shifting the U.S. position back in favor of Saudi Arabia under the guise of fighting ISIS.
Anticipating that the Trump Administration may try to ease sanctions on Russia through executive order, a
bipartisan group of senators has introduced a bill that would expand Congressional oversight of any such
Early indications from the Trump Administration hint at efforts to tip the balance back towards the Saudis.