Gulf attacks on oil tankers raise risks in Iran crisis
Images of two smouldering and abandoned tankers in the middle of one of global oil’s busiest thoroughfares have been met with a surprisingly mild reaction on global markets.
- Tensions in the region are rising following attacks on oil tankers and facilities near the Strait of Hormuz
- The Strait of Hormuz is the biggest global chokepoint for oil with around 30pc of seaborne barrels passing through it
- The US has blamed Iran and its proxies for the attacks, while Iran has accused the US and its allies of “warmongering”
They shouldn’t have been.
The 4 per cent spike in the global Brent crude benchmark immediately after the attack hit news wires exhibited, at best, a degree of concern.
Ultimately, the price settled 2 per cent higher over the day’s trading but, next to the 15 per cent slide over the past month, it is not white-knuckled panic.
However, tensions around the Gulf of Oman in general, and in the Strait of Hormuz in particular, have been rising dramatically as the reintroduction of US sanctions against Iran begins to bite.
Four tankers were attacked off the United Arab Emirates coast last month, while drone strikes on two Saudi oil-pumping stations were reported soon after.
The US has blamed Iran, rather than its proxies in the region (such as the Houthis in Yemen), for the most recent attacks, accusations Iran strenuously denies.
“This assessment is based on intelligence, the weapons used, the level of expertise needed to execute the operation, recent similar Iranian attacks on shipping, and the fact that no proxy group operating in the area has the resources and proficiency to act with such a high degree of sophistication,” US Secretary of State Mike Pompeo said.
Iran’s retort was this was all “warmongering” from the US and its regional allies Saudi Arabia and the UAE.
“The international community [must] live up to its responsibilities in preventing the reckless and dangerous policies and practices of the US and its regional allies in heightening the tensions in the region,” the Iranian mission to United Nations said in a statement released after last night’s attacks.
While it is still unclear exactly what happened to the Norwegian-owned Front Altair or the Japanese-owned Kokuka Courageous, what is clear is that the US Fifth Fleet is more engaged now, arriving quickly to assist with evacuations and generally stamp its authority on the region.
Oil corridor straddled by Iran on one side and the Arabian peninsula on the other
The Strait of Hormuz is the world’s most important energy chokepoint, carrying around 30 per cent of the world’s seaborne traffic in oil.
The northern coast is dominated by Iran and its network of naval bases, including Qeshm, Bander-e-Abbas and Larak Island.
To the south lie the United Arab Emirates and Oman, with the US Fifth Fleet based further up the Persian Gulf at Bahrain.
RBC’s global head of commodity strategy Helima Croft says the attacks underscore the severity of the security risks stemming from the Iran crisis and the difficulty in dialling down the tensions while US sanctions remain in place.
She pointed out the attacks came one day after 26 people were injured when a missile which Saudi Arabia claimed was fired by Iranian-backed Houthi rebels hit an airport in the south of the country.
“Moreover, it also comes days after the Iranian Foreign Minister told his German counterpart that the countries that wage economic war ‘cannot expect to remain safe’,” she added.
The US is going after Iranian oil in a big way
At the heart of the renewed tension is the economic straitjacket Iran has been placed in by the US sanctions.
Last month the US ended exemptions granted to eight countries — including India, China, Japan, South Korea and Taiwan — on importing oil from Iran.
The stated aim was to reduce Iran’s oil exports to zero, which is a fairly blunt weapon given oil accounts for almost 80 per cent of Iran’s tax revenue.
The country has already lost $US10 billion since the initial US sanctions took effect late last year.
Iranian oil exports fell sharply in May, the first month following the end of US sanctions exemption. (Supplied: ANZ)
“The Trump administration and our allies are determined to sustain and expand the maximum economic pressure campaign against Iran to end the regime’s destabilising activity threatening the United States, our partners and allies and security in the Middle East,” the White House said in a statement at the time.
Ms Croft said the decision to eliminate all exemptions for importers of Iranian oil presented a catastrophic blow to the entire Iranian economy.
Even before the decision to end the exemptions, the International Monetary Fund forecast Iran’s economy would contract by 6 per cent this year and inflation would soar above 40 per cent — forecasts that are now looking fairly conservative.
“The [oil] market had mainly moved on from the Middle East after President Trump publicly insisted that he did not want war with Iran and reignited trade war concerns with his tariff tweets,” she said.
“However, we believe that escalation will likely be the order of the day as long as the United States continues its ‘maximum pressure’ policy and insists that Iran completely abandon its revolutionary agenda in order to receive economic relief.”
Iran’s hardliners are pushing back against the US pressure
Hardline elements within Iran have become increasingly dominant since the US pulled out of the Iran nuclear deal, which offered to reduce sanctions in return for Iran winding back its nuclear program.
Ms Croft said Iranian hardliners had “vowed a more forceful response to the measures that they contend are designed to cause an economic collapse and trigger regime change”.
“Qassem Soleimani, the commander of the Revolutionary Guard’s Quds Force, may not want a full-blown shooting war but he may be willing to push the region to the brink of one to get the United States and its allies to reconsider their current course of action.”
She argues the Fifth Fleet’s presence means it would be difficult for Iran to actually carry out its threats and completely choke off the 18.5 million barrels a day passing through the Strait of Hormuz every day.
But the Revolutionary Guard has the capacity to harass vessels and carry out one-off attacks on tankers.
“The maritime attacks raises the spectre of a potential return to a tanker war scenario if the current crisis deepens.
“During the Iran-Iraq War [1980-88], hundreds of international vessels and oil installations were targeted by the warring sides in an effort to deprive their rivals of trade revenue, and ultimately the US Navy was forced to intervene to protect Kuwaiti ships in what was at the time the largest US naval convoy operation since WWII.”
A naval mobilisation of that size is likely to shake the oil market’s nonchalant attitude and see a rebound in oil prices.
Ms Croft sees Iran’s desire to rebuild its nuclear capability and enrich its uranium stocks to near-weapons grade standard, and the potential exiting of the 1968 nuclear Non-Proliferation Treaty as the real crisis that is looming.
“Such a move would amount to an explicit signal that the Iranian nuclear program has a military dimension, and could cause the type of security crisis we have warned about coming to fruition, one that many in the market had seemingly written off or at least shrugged off for now.”