Oil & Gas Summiteer

January 11, 2020

Global oil in a cycle of escalation

oil & gas

File: Oil

By Sonny Atumah

President Donald Trump in a broadcast last Wednesday spoke to Iranian leaders insisting that the United States wants them to have a “great future, one that you deserve—one of prosperity at home and harmony with the nations of the world.

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The Iranian Supreme Leader, Ayatollah Ali Khamenei had made good his promise of forceful revenge as the Islamic Revolutionary Guard Corps Air Force launched Operation Martyr Soleimani, firing tens of ground-to-ground missiles at the United States Ain al-Assad military base in Iraq last Wednesday. It was also reported that a military base in Irbil, in the Kurdish part of Iraq was struck by ballistic missiles.

Ain al-Asad is a hub for houses for about 1,500 members of the U.S. military and the United States-led coalition fighting the Islamic State militant group. To Trump, the United States is ready to embrace peace with all who seek it.  “For far too long, all the way back to 1979 to be exact, nations have tolerated Iran’s destructive and destabilizing behaviour in the Middle East and beyond.”  He said Iran had been the leading sponsor of terrorism and their “pursuit of nuclear weapons threatens the civilized world.”

What was to become a spiraling tit-for-tat situation with a frontal, disproportionate attack was ruled out by President Trump. Trump in response to the attack was that the U.S. suffered no casualties in Iran’s attacks on the military bases in Iraq. Many watchers are stunned and doubted Trump’s sincerity in his mien that ‘All is well’ after the Bases’ attack in Iraq. Oil markets reacted to the January 3, United States pre-dawn air raids near Baghdad International Airport that killed the Iranian head of Islamic Revolutionary Guard Corps’ Quds Force, Maj. Gen. Qassem Soleiman. He was accused of driving sophisticated, terrorist and militant groups including the Palestinian Hamas and Islamic Jihad, Lebanon’s Hezbollah, Yemeni Houthi rebels, and the Shiite militias in Iraq. His proxy fighters allegedly recruited from Iraq, Afghanistan and Pakistan  were trained in Iran and Syria. Soleimani’s killing has put an end to his campaign of guerrilla warfare but at home he was a hero. Would the current Middle East tension significantly affect oil supplies globally? Global analysts believe that with diplomatic maneurvres oil supply and demand dynamics may remain where they were before these incidents.

A swift market price increase reached one of the periodic crescendos with global benchmark Brent crude oil trading at US$71.75 last Monday. The United States benchmark the West Texas Intermediate, WTI which also surged to the highest level since April 2019, traded at US$64.91 on Wednesday, again came down to US$59.61 same day.

Higher oil prices portend negative global economy that could accelerate the feared global recession. Some believe that with the rising production of United States shale and Norway, global oil market would be oversupplied in 2020. The geopolitical tension that is heightening between the United States and Iran in the Middle East appeared as if there are pretensions. Trump has previously vowed to hit back at Iran if it retaliated for the US drone strike that killed Qasem Soleimani.

Analysts believe the 1953 American oil politics that favoured regime change in Iran is still at play. Iran has one of the largest oil and gas reserves in the world. China and Russia are proxy fighters in Iranian oil geopolitics. The world oil market speculated and waited for response from Iran and it came. The Trump administration may have considered the global economy that is teetering on the verge of weak manufacturing that would suffer if tensions escalated. Again, the United States shale oil may survive only in the short term. Without military option investors have regained confidence, and crude prices retreated. The new narrative of Trump is that his administration will impose new powerful sanctions until Iran changes its behaviour.

Tensions steadily intensified between the United States and Iran when Trump withdrew from a 2015 Iran nuclear deal and restored crippling sanctions. Iran on Sunday signified its intention to suspend compliance with the 2015 nuclear agreement. It meant Iran would take an even bigger step away from the deal on uranium enrichment. It pledged to cooperate with the International Atomic Energy Agency’s inspectors if economic sanctions are lifted.

Trump, on Wednesday, called on the five permanent members of the Security Council plus one (P5+1): United States, Britain, China, France and Russia plus Germany that signed the 2015 Iran nuclear deal to break off from the agreement. China which buys about a third of Iran’s crude exports will always oppose the sanctions on the basis of United States unilateralism. Trump reinstated the sanctions that took effect on November 4, 2018, to put maximum pressure on Iran to withdraw from alleged destabilizing activities in the Middle East.

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That is the crux of the matter. Another danger may be the Persian Gulf and its passage, the Strait of Hormuz where analysts believe Iran in desperation may block the narrow Strait of Hormuz at the choke point. The Strait of Hormuz is the world’s single most important oil passageway that takes over 21 million barrels of oil daily. Tankers are already suspending transits of oil tankers through the strait. The situation calls for caution to reduce the network of militia groups whose clandestine, asymmetrical activity in the Middle East would plague the world.