WTI and Brent crude oil prices rises by +0.30% to $62.50 and $72.50 per barrel respectively during the Thursday’s European trading session amid the ongoing tensions in the Middle East and the sabotage attacks in the Saudi Arabian oil infrastructures. The current escalation has increased the fear for more supply disruption in the already tight supply oil market due to the lower oil production from Venezuela and Iran based on the US sanctions, the Libyan civil war and the lower output from the North Sea oilfields.

The crude oil market is focusing on the escalation of tension in the countries of Persian Gulf after the two “sabotage attacks” in row since Sunday, the first one against two Saudi Arabian oil tankers in the Fujairah port in UAE (one of the world’s largest bunkering hubs) near Strait of Hormuz on May 12 and the second one was a drone attack against two Saudi oil pumping stations in the Saudi East-West pipeline which flows at the Yanbu port on the Red Sea on May 14.

The pipeline has a capacity of about 5 million barrels per day and connects the Saudi’s East oil fields with the Yanbu port on the Red Sea at the West of the country, allowing it to export almost 3.5 million bpd, approximately the half of the current Saudi exports in European countries towards Canal of Suez , skipping the significant maritime export routes of Strait of Hormuz and Strait of Bab-el-Mandeb in the Yemen Sea which are partly controlled from Iran and their proxy allies of Yemen Houthis rebels.

The Strait of Hormuz, which is a tiny waterway passage-only 21 miles wide, touching Iran on north side and Oman-UAE on the south side , is the world’s most important crude oil chokepoint and geopolitical significance, as it connects the oil rich countries of Persian Gulf to the outside world without alternative export oil route. Around 40% or near 20 million barrels of the world’s traded crude oil is transported through the straits, especially the majority of oil exports of Saudi Arabia, Iraq, Iran, Kuwait, Bahrain and the significant LNG-Liquid Natural Gas exports from Qatar.

Even thought, the damages in both Saudi’s oil infrastructures were very small and didn’t influenced the normal daily operations, the attacks have hit the warning bell to the Saudis and their allies as the attackers used sophisticated products such as drones and self-designed torpedoes against the oil tankers. The attacks were very well prepared and designed while they chose to target the weakest spots: the two only oil export routes, the major oil pipeline in the Red Sea and the only maritime export route in the Persian Gulf, the Strait of Hormuz.

The oil markets are very sensitive in such supply disruption risks especially after Saudi Arabia has reassured the global oil customers to replace the missed Iranian and Venezuelan oil using their spare oil capacity. Saudi Arabia is the only country-oil producer that can actually cover the supply deficit and therefore, possible damages to their oil export infrastructures from more sabotage attacks might cost serious global oil supply disruptions and further rise in the oil prices.

 

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Vrasidas Neofytou

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