The United States keeps signaling that it has hard power. Most recently, the United States made known that it was deploying additional ships, the USS Abraham Lincoln and USS Arlington, to the Middle East. The USS Abraham Lincoln is now said to be in the Red Sea. This deployment follows a similar U.S. movement in the South China Sea. There appears to be a lot of hard power on display these days since China and Russia have also been moving military assets around the globe in a similarly transparent, public manner. You would think that all this bravado of big military hardware would be minimizing risky actions by small players. But, ironically, all this symbolism isn’t achieving much where oil security is concerned. That’s because state and non-state actors alike have learned that “sabotage” is hard to react to. But just because these acts of sabotage to date have seemed minor, it doesn’t mean that they are not geopolitically significant. Taken en masse, they are a symptom of an increasingly unstable setting at a time when spare oil production capacity in and outside OPEC is quite limited.
The point is that as tensions rise among large and mid-size global powers, the list of recent and unusual oil sabotage acts is growing, and they could eventually add up to a major problem for oil markets.
First, there was the mysterious contamination of Russia crude shipments to Belarus. That “sabotage,” now reportedly under investigation by Russia’s Federal Security Service (FSB), will reduce the availability of the physical storage tanks for some refineries along the Druzhba pipeline since removing the tainted oil by slowly diluting it in small amounts into clean oil will take months. The explanation of corruption should give little comfort. If the Kremlin cannot control its local corruption problems, or if it so wanted to teach a lesson to Belarus that it was willing to disrupt the reputation of its own oil exports, or if some technical production and collection problem was hard to solve, it’s not good news for European oil consumers.
The Russian problem was followed by this week’s “sabotage” in the Persian Gulf which seemed to traders similarly penny-ante. First, a handful of ships near the port of Fujairah appeared to be bashed in with a sharp object like a limpet mine or ramming by another vessel or weapon on Sunday. Oil traders joked on twitter that the attack was not aimed to be serious since it is hard to move oil prices on a Sunday. Still, the location of the attack was significant because the United Arab Emirates has been investing to capitalize on the port’s location outside the Strait of Hormuz to expand crude oil storage facilities. Fujairah is also the location Arab countries held floating storage of over 70 million barrels of crude oil back in the mid-2010s as a precaution against oil disruptions following Russia’s invasion of Ukraine and Iranian statements threatening to close the Strait of Hormuz. The head of Iran’s Parliament’s national security committee tweeted that that “explosions” of Fujairah showed that the security of the south of the Persian Gulf is “like glass.” Initial rumors that Saudi oil tankers were on fire or that the Fujairah port was on fire turned out to be fake news.
A day later on Monday, Saudi Arabia confirmed that a drone attack had damaged two pumping stations on its East-West pipeline that carries oil from large eastern Saudi oil fields to the kingdom’s west coast where it can be exported to circumvent the Strait of Hormuz. Saudi Arabia also has export-oriented refineries on its west coast that typically serve Europe and utilize crude oil shipments from the East-West pipeline. Saudi Aramco had recently announced plans to expand the East-West pipeline and keeps chemical drag reduction agents on hand at the pipeline that mean the pipeline could handle up to 6.5 million barrels per day (b/d) of exports of crude oil via the Red Sea in an emergency, thereby bypassing the Strait of Hormuz. Last year, over 2 million b/d of oil were sent along the pipeline as part of normal logistical operations.
To date, the oil market has reacted with a relative yawn to all these various sabotage reports. But the breakdown in norms across the globe – whether those norms are the free and clear operations of sea lanes, respected guarantees of oil quality, or most importantly, the safety and security of citizens, workers and vital energy infrastructure inside national borders-- is bad news for an internationally traded commodity like oil.
A typical trader response is that the U.S. trade war with China takes precedence over these small sabotage events, given that trade conflict’s long run potential to harm global economic growth. However, analysts say China may be willing to add to its stimulus plans at least for now and so far, few are predicting a U.S. recession any time soon. By contrast, oil analysts from Wall Street firms such as Cornerstone Macro and Citi caution that the number of recent geopolitical events with implications for oil markets are running unusually high. The idea that U.S. production exists as a safety net seems equally spurious, even under the best of circumstances. U.S. output growth in any given month faces real limitations. Optimistic predictions for the Permian Basin that it could someday reach 8 million b/d might be possible, but for now, U.S. crude oil production is less than 15 percent of total global supply.
Trump administration officials hint that Washington is prepared to use the U.S. Strategic Petroleum Reserve (SPR) and Washington-watchers figure the White House might ultimately be slow to turn any screws intended to stop China from buying Iranian oil. But as internal pressures on a wide variety of petro-regimes from around the world mounts, it might become harder and harder to stave off an upward march for oil prices this summer as small scale “sabotage” takes its toll on oil facilities in multiple locations at the same time internal conflicts continue to loom in major producing countries like Venezuela and Libya. The White House shouldn’t take great comfort in the fact that oil traders are relaxed. They (and their algorithms) could be simply wrong.