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What Trump’s “Baffling Decision” Means For The Saudi-Iran Crisis

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Via Oilprice.com

The attack on an Iranian oil tanker last week reignited tensions between Tehran and Riyadh.

Iran and Saudi Arabia had seemingly pulled back from the brink of war last month, and tensions were on the wane as the U.S. and Saudi Arabia showed no appetite for military conflict following last month’s attack on Abqaiq.

But on October 11, an Iranian oil tanker was apparently hit by explosions, and Iranian officials denounced the attack while also saying that they were still looking at the evidence.

For its part, Saudi Arabia denied any involvement. “We did not engage in such behavior at all. This is not how we operate and that’s not how we did (it) in the past,” Saudi Arabia’s foreign minister, Adel al-Jubeir, told reporters.

Political risk firm Eurasia Group said that there are several possible explanations. The location in the Red Sea near Saudi shores raises obvious suspicion about the role of Saudi Arabia. But the attack could also have conceivably come from Israel, Eurasia Group said. Or, a terrorist group.

Oil prices rose on Friday, but markets were up more broadly on news that the U.S. and China were making progress on trade negotiations. As such, it’s not clear that traders were bidding up prices due to geopolitical risk.

But the explosions were only the latest in a string of attacks in the region in recent months.

Related: Iran President Vows Revenge For Oil Tanker Attack

“This incident is likely to prompt market participants to focus more attention again on the tensions between Iran and Saudi Arabia,” Commerzbank said in a note on Friday. “The market had ceased focusing on these tensions of late and had completely priced out the risk premium – which now seems somewhat premature.”

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The latest tanker attack could also hike costs for shipping in what is now seen as a very risky part of the world. “This latest incident will drive insurers to raise further War Risk insurance rates for vessels operating in the region, over and above the tenfold increase to rates since the attacks on tankers in May,” Jonathan Moss, Head of Marine & Trade at DWF, said in a statement. “Shipping companies operating in the region will be forced to absorb these added costs with affordable insurance in this high-risk zone becoming harder to find. This could lead to cost-cutting measures in other areas of maritime trade.”

However, as mentioned, Iran and Saudi Arabia are not eager for a hot war. Iran’s economy is under severe pressure as it is, and would suffer badly from a major military conflict. At the same time, Riyadh has struck a notably measured tone since the Abqaiq attack, reeling from such a massive blow, but also rattled by the lack of support from the Trump administration.

It is that latter point that may prove to be highly significant. Saudi Arabia no longer feels that it can trust the United States. President Trump’s impulsive and incoherent strategy in the region, which is devoid of any predictable policy process, has Riyadh scrambling for an alternative approach. The New York Times reported earlier this month that the Saudis and Iranians were making tentative steps towards diplomacy. “The worst outcome for the Saudis is to move to a confrontation with Iran expecting the U.S. to support them and find out they won’t,” Philip Gordon, a former White House coordinator for the Middle East, told the NYT.

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That all came before the baffling decision by President Trump to inexplicably sell out the Kurds, a decision that immediately paved the way for an invasion of northern Syria by Turkey. Trump moved U.S. troops to Saudi Arabia, but a Saudi diplomat called the decision “a disaster for the region.”

Facing an international backlash, Trump announced a series of measures on Monday meant to punish Turkey, including sanctions on Turkish officials and a 50 percent tariff on Turkish steel. But it’s already too late to undo the invasion. Related: Buffett’s Big Bet On Energy

Meanwhile, it’s unclear what will happen next between Iran and Saudi Arabia. The Trump administration has demonstrated that its strategy in the region, beyond the aggressive use of sanctions, is hollow.

That leaves a difficult situation: Iran feels compelled to lash out because American sanctions continue to strangle its economy; the U.S. wants to keep sanctions in place but has no interest in diplomacy, and Saudi Arabia has no idea how much it can rely on the U.S. in this confrontation. Iran’s goal is the removal of sanctions, but in the absence of any diplomatic path forward, Tehran’s strategy seems centered on disrupting oil flows in the region.

“The circumstances of the tanker attack on 11 October may well end up dictating Iran’s next steps,” Torbjorn Soltvedt, Principle MENA Analyst at Verisk Maplecroft, said in a report. “Almost one month after the attacks against Khurais and Abqaiq there is still nothing to suggest that anything resembling a resolution to the crisis is within reach.”

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By Nick Cunningham of Oilprice.com

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