Persian Gulf upheaval brings oil market jitters: Fuel for Thought

The past month has been a tumultuous time for the Persian Gulf region, one bound to send shock waves through global markets, not least the international oil market. While it is still far too early to detect a building tidal wave, that cannot be entirely ruled out.

The confluence of potentially ground-changing events taking place in recent weeks in and around the oil-producing Middle East heartland, culminating in regime change in Saudi Arabia, has been extraordinary. In one way or another, each seemingly disparate link in the recent chain of events may be connected not only to each other but also to oil.

First, on May 19, came the landslide re-election of Iranian President Hasan Rouhani.

The largely unforeseen groundswell of popular support for the politically moderate cleric, in the face of hardline opposition, signaled a grassroots desire for change and for dismantling confrontational barriers that for years have served to isolate Iran.

To sustain that throughout his second presidential term, Rouhani must now deliver on pledges to attract more foreign investment and technical expertise to Iran’s petroleum sector. Consequently, the country’s petroleum ministry is gearing up for the long-awaited award of the first development contracts under Iran’s new contract model for upstream oil and gas developments.

The next day, US President Donald Trump landed in Riyadh to a rapturous reception from senior Saudi royalty, led by King Salman and his favored son, the powerful 31-year-old then Deputy Crown Prince Mohammed bin Salman.

They say money talks, and in the Middle East, oil money has an especially loud voice. On May 20, some $400 billion of Saudi money, pledged to the US mainly through the world’s biggest arms deal to date, said OPEC kingpin and leading international crude exporter Saudi Arabia wanted to re-set its relations with the largest Western oil consumer.

Even so, the massive arms deal strongly hinted that Riyadh wanted more from the US than the guarantee of western-hemisphere market continuity for Saudi crude amid rising US light oil and condensate production from shale beds.

Rouhani’s re-election in Iran with a clear popular mandate to pursue more open international relations, was welcomed by neither Trump’s entourage nor Saudi officials.

Indeed, Riyadh would have little to gain from a more open Iran continuing to rebuild its oil sector and in time possibly regaining its former position as OPEC’s second biggest oil producer amid increasing rivalry for market share in the key Asian oil market.

Pointedly, neither Trump nor Salman congratulated Rouhani on his victory. However, the emir of Saudi Arabia’s small Arabian Peninsula neighbor, Qatar, did so in a personal call to the re-elected Iranian president.

The significance of that became clear on June 5, when Saudi Arabia, the UAE, Bahrain and Egypt, followed by several other states, abruptly severed diplomatic and transport ties with Qatar over long-standing allegations that the maverick emirate had been financing Islamist terrorist groups that threatened the security of its Arab neighbors.

New crisis more severe than 2014 spat

The spat with Qatar, a minor OPEC oil producer that had built enormous national wealth by exploiting the vast offshore gas field it shares with Iran, had been brewing for some time, but the timing and severity of the rift came as a surprise.

It went far beyond the events of 2014, when Saudi Arabia, the UAE and Bahrain temporarily withdrew their ambassadors from Doha, allowing them to return only after Qatar undertook to monitor private as well as state funding of agencies that might be used as conduits for financial aid to terrorists.

Qatar’s three immediate Arab neighbors now say those pledges were not honored, which Doha denies. On that basis, they have attempted to isolate Qatar through closure of the state’s only land border—with Saudi Arabia—by banning Qatari planes from neighboring airspace, and Qatari ships from its neighbors’ territorial waters and ports.

Despite recent port authority circulars indicating that non-Qatari vessels with co-loaded cargoes would be allowed to bunker at Fujairah, such uncertainties seem likely to persist as long as the crisis drags on. Last Monday, UAE Minister of State for Foreign Affairs Anwar Gargash said in Paris that “Qatar will realize that this is a new state of affairs and isolation can last years.”

Analysts do not dispute that bringing Qatar to heel would consolidate the upstart Saudi prince’s grip on power, although opinions vary on the extent to which his ambitions are at the root of the current crisis.

The hope might be that removing any doubts about the Saudi succession might help stabilize both Saudi Arabia and its entire oil-rich immediate neighborhood, stemming potential contagion from regional conflicts that have engulfed several peripheral Arab states—Syria, Iraq, Yemen, Libya—while threatening to destabilize Bahrain.

The risk is that sustained hardline Saudi-led policies against Qatar and Iran may deepen rather than heal the existing regional rifts and could also politicize future OPEC decisions.

That might in turn extend and exacerbate the current disruptions to international oil and gas trade, heightening market volatility.

Like the Saudi Arabia Vision 2030 economic program, it is a huge strategic gamble that has no guarantee of success.