The oil market may be underestimating Iran’s ability to disrupt oil flows in and out of the Middle East and its potential repercussions.
Consensus opinion has been dismissive of Iran’s recently renewed threats to block oil flows through the Strait of Hormuz in retaliation against US sanctions as pure bluster, especially in view of the heavy US military presence around the Persian Gulf. But an attack by the Iran-aligned Houthi rebels in Yemen on two Saudi oil tankers, which prompted Aramco to indefinitely suspend oil shipments through the Bab el-Mandeb strait from July 26, shows that Tehran has the other major chokepoint of the Arabian Peninsula within its reach as well.
Other Middle Eastern producers’ oil shipments through the Bab el-Mandeb, a narrow waterway that connects the Red Sea with the Arabian Sea, have remained normal and traders were expecting Saudi shipments to resume once the kingdom had made adequate security escort arrangements for its tankers. But it would be dangerous to discount the nuisance value of the Houthis, who have stepped up missile attacks against Saudi Arabia over the past several months, and who may be leveraged even more by Tehran amid an escalating war rhetoric with the US.
While the target of the Houthi rebels, who took over the government in Sana’a in late 2014, is Saudi Arabia, which backs the now exiled government of Yemen, an escalation of attacks in the Bab el-Mandeb strait or the Red Sea could bring all oil traﬃc through those waters to a complete halt.
The strait is a busy channel for crude and refined product shipments moving in both directions, north and south. An estimated 4.8 million b/d of crude and refined products flowed through the waterway in 2016, according to the US Energy Information Administration. The strait is also a conduit for Middle East crude and refined product shipments to Europe and the US through the Suez Canal and the SUMED pipeline to its north in Egypt, which connect the Red Sea to the Mediterranean Sea. Some 3.9 million b/d of crude and products passed through the Suez Canal in 2016, while the SUMED pipeline system has the capacity to move 2.34 million b/d of crude, according to the EIA.
Crude flows into and refined product exports out of the Yanbu and Rabigh refineries on the west coast of Saudi Arabia, each with a capacity of 400,000 b/d, also need access to the Bab el-Mandeb. Only the Yanbu refinery can receive Saudi crude from Jubail via an overland East-West pipeline system.
For Iran, targeting the Bab el-Mandeb and onshore Saudi oil installations through the Houthis provides wider access to the kingdom’s facilities as well as deniability, which it would not have, were it to attack the Strait of Hormuz on its own.
The crude market largely shrugged oﬀ the growing war of words between the US administration and Iranian leaders this week. But it will be forced to take notice if the Houthis escalate attacks against Saudi Arabia and maybe even its ally the UAE, or continue targeting ship movements through the Red Sea. Houthis claimed they attacked the international airport in Abu Dhabi using an armed drone that flew over 1,500 km to its destination on Thursday, though the UAE flatly denied such an incident occurred, while experts doubted that the rebels have such capability.
Though crude’s price recovery this week from the depths plumbed last week was also helped by a draw reported for last week in US crude and refined product stocks, the upside was limited. Two major bearish factors remain in view: increased supply from Saudi Arabia and a few other OPEC/non-OPEC producers, and a possible slowdown in oil demand if the US-China trade war continues to fester.
A potential supply shock if Washington adopts a tough stance against buyers of Iran crude may seem distant, given the November 4 implementation of US sanctions against Iran’s oil sector. But the Bab el-Mandeb attack this week shows oil supply could be jolted from other directions and at any time.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)