By Julian Lee, Bloomberg: Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
The chances of President Donald Trump easing sanctions on Iran’s oil exports have dropped to zero after an attack on Saudi Arabia’s oil industry that his Secretary of State Mike Pompeo has pinned on Tehran. The bigger challenge now will be reining in the U.S. hawks calling for retaliatory strikes on Iran’s energy industry facilities.
Before this weekend the big political news dominating the oil market was the sudden departure of John Bolton as Trump’s hardline national security adviser. His leaving raised hopes (or fears, depending on your point of view) that waivers from sanctions might be reinstated for some buyers of Iranian crude; there was talk even of Trump meeting with Iran’s President Hassan Rouhani later this month.
I’m deeply skeptical about whether such a diplomatic breakthrough would have taken place without Trump reopening Barack Obama’s nuclear deal with Iran, which the current president scrapped last year. I can’t believe Trump would have been willing to do that. The drone strike on Saudi Arabia’s Abqaiq oil processing facility in the early hours of Saturday morning makes such speculation irrelevant anyway.
Pompeo appears to have taken on Bolton’s mantle of White House ultra-hawk. He blamed Iran for the attack in a Saturday tweet, even though responsibility has been claimed by the Houthi rebels being bombed savagely by a Saudi-led coalition in neighboring Yemen. They have plenty of incentive to retaliate.
The secretary of state went further than linking Tehran to the attack through its training and support of the Houthis, who are part of a network of militant groups in the Middle East allied with Iran. “There is no evidence the attacks came from Yemen,” Pompeo said in his tweet. He’s yet to share any evidence that it came from Iran either.
It would be better if he did. Memories of the “evidence” of Saddam Hussein’s non-existent weapons of mass destruction that precipitated the 2003 invasion of Iraq still linger. It’s a big step to say the attacks came from Iran. An earlier strike against Saudi Arabia’s East-West pipeline was deemed eventually to have been launched by Houthis operating from the sparsely-populated territory of south-western Iraq, although Iraq has denied that its territory was used for the new attack.
Saudi Arabia started its devastating bombing campaign in Yemen in 2015 – with some U.S. backing and weaponry – after the Houthis took control of the capital and other parts of the country. Despite thousands of civilian deaths, terrible human rights abuses on both sides and a humanitarian catastrophe, the war has settled into an ugly stalemate. Saturday’s attack, along with previous drone strikes, shows the Houthis’ effectiveness in inflicting damage well beyond Yemen (if indeed it was them).
Not surprisingly, Iran’s foreign ministry has denied responsibility. It now needs to go further and try to rein in its clients in Yemen. For its part, the U.S. should do the same in Saudi Arabia. Failure to do so will only lead to more attacks on the region’s oil infrastructure and more costly disruptions to supply.
The Saudis will need weeks to restore full production capacity, according to my Bloomberg News colleagues Anthony DiPaola and Javier Blas. Other members of the OPEC+ group, who have been restricting output to boost oil prices since the start of 2017, will open their taps. But more than 85% of the OPEC production cut since January has come from Saudi Arabia itself. The available spare capacity is a lot less than it might appear at first sight.
Riyadh was no doubt fearful that any rapprochement between Trump and Rouhani would have led to millions of barrels of Iranian oil gushing back onto the market, thereby scuppering the Saudi effort to support the crude price. The Abqaiq attack, and Pompeo’s response, shows there is no chance of that now. But the vulnerability of Aramco’s own installation to such strikes has created an infinitely worse problem.
First published in Bloomberg. Cartoon by Shadi Ghanim.
Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.