This morning the Trump Administration indicated that U.S. policy towards North Korea is moving from “strategic patience” to “strategic accountability”. That summary of the current situation seems far less bellicose than recent statements by either side. Moreover, U.S. policy is focused on encouraging China to step in more proactively, which gives the impression that U.S. direct action is still arm’s length away. Yet, as discussed below, misperceptions on both sides could quickly lead either side to escalate from statements to action.
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.
Early indications from the Trump Administration hint at efforts to tip the balance back towards the Saudis.