Don’t Overthink the Gulf Oil Tanker Attacks

(Bloomberg Opinion) -- Four oil tankers, two of them Saudi-owned, were attacked Sunday near the Strait of Hormuz, the entrance to the Persian Gulf. Any assault on shipping is a cause for concern, but it becomes particularly worrying when it happens in, or close to, the world’s most important chokepoint for oil.

Crude oil rose by as much as 2.8% after London markets opened Monday. Though it is easy to see how the incident would add upward pressure on oil prices, it is far from certain that the incident will create any serious or lasting impact on shipments or the cost of crude.

Tankers hauling more than 16 million barrels passed through Hormuz daily in the first four months of 2019, Bloomberg tanker tracking shows. That’s equal to about 40% of all the crude traded internationally.

All oil exports from Kuwait, Iran, Qatar and Bahrain, about 90% of those from Saudi Arabia and Iraq, and 75% of shipments from the U.A.E. pass through the area.

Most of those countries have no alternative routes for their exports. The U.A.E. can deliver some of its crude to the terminal at Fujairah, on the Gulf of Oman, but that may not make it much safer, as that is where Sunday’s alleged attack happened. Much of its oil is produced from fields beneath the waters of the Persian Gulf and must pass through the strait.

Saudi Arabia does have a pipeline to its Yanbu export terminal on the Red Sea, which has a capacity to carry 5 million barrels a day of crude, according to the prospectus published April for the company’s international bond sale. But that line is used to deliver oil to the kingdom’s refineries, as well as for export. It could probably be used to divert around 2.5 million barrels a day of Saudi crude away from the Strait of Hormuz, as long as the export terminal facilities at Yanbu could handle the additional tankers.

Though that is encouraging, the idea of any Saudi crude suddenly having to come off the market is worrying given that it is poised to raise production to make up for the loss of Iranian output due to U.S. sanctions.

These concerns over the safety of oil exports from the Middle East add to existing worries over supplies from the Shaky Six group of countries, which includes Iran, Venezuela and Libya. The failure of Juan Guaido’s attempt to spark a military uprising against President Nicolas Maduro means that Venezuela’s oil production is likely to continue its seemingly inexorable slide. In Libya, the continuing conflict between General Khalifa Haftar’s Libyan National Army and the internationally recognized government in Tripoli is jeopardizing the country’s efforts to restore output to levels seen before the revolution earlier this decade.

Attacks on oil tankers in the region are rare, and when they do occur, the don’t necessarily disrupt activity. Ships continued to pass through through the Strait of Hormuz during the so-called “tanker war,” a phase of the 1981-’88 conflict between Iraq and Iran when both countries assaulted vessels in the Gulf. Oil also continued to flow during the first Gulf War in 1990-’91 and during the previous round of sanctions on Iran, when it threatened to close the waterway. It was a similar situation when a Japanese tanker, the M. Star, was damaged by a bomb in 2010 about 14 miles (22 kilometers) off the U.A.E. coast near Fujairah. The Brigades of Abdullah Azzam, a Sunni militant jihadist group, claimed responsibility.

Unless there is a serious escalation after this weekend’s events, there’s a very good chance that oil tankers could continue to make their way through the waters unaffected.

There is another reason why they may not have a lasting impact, stemming from the notable and puzzling lack of information about them.

The United Arab Emirates first reported that four commercial vessels were attacked off the emirate of Fujairah on Sunday morning. Later stories from media in the U.A.E. and Saudi Arabia said that two of those ships were oil tankers belonging to the National Shipping Company of Saudi Arabia, Bahri. Tanker tracking data show they were as much as 10 miles (16 kilometers) apart when the incident happened.

The names of the vessels were publicly confirmed 36 hours after the event, which is a substantial delay. There has yet to be any footage, photographs, or official outrage that can compare to the graphic images that were released in connection with similar incidents in recent years. All we know from official sources is that there was no loss of life and no leak of fuel into the ocean.

Until officials publish more details, this incident will continue to look odd. Market participants will be justified in considering the possibility that the attack may now be getting rather a lot more attention than it deserves, and in maintaining a healthy skepticism that the region’s oil flows are at risk.

--With assistance from Elaine He.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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