Hand in hand, geopolitics and fundamentals are moving together, generating ripples in the crude oil markets. With the Saudi led alliance assault on Hodeidah seaport of Yemen continuing, Houthi rebels are resorting to new techniques. And in the process, oil is once again the casualty.

On Thursday, Saudi Arabia announced halting crude oil and oil product shipments via the Bab-el-Mandeb chokepoint in the Red Sea after a Houthi attack on two Saudi Very Large Crude Carriers (VLCC) near the port of Hodeidah a day earlier.

Reuters quoted Saudi Oil Minister Khalid al-Falih as saying, “Saudi Arabia is temporarily halting all oil shipments through Bab-el-Mandeb Strait immediately until the situation becomes clearer and the maritime transit through Bab-el-Mandeb is safe.”

The Bab-el-Mandeb strait is the route that most crude oil shipments through the Suez Canal take to reach international markets, with a daily throughput of some 4.8 million barrels per day (bpd) of crude and oil products as of 2016. The strait is between the northeastern African coast and Yemen, and while in the past piratesfrom North Africa were the biggest threat for vessels there, now the Houthi-Saudi conflict has added substantial risks for maritime transport in the region.

The conflict is widely seen as a proxy war between Iran, which supports the Houthi militia, and Saudi Arabia. To some, the attacks last week on Aramco VLCCs could be linked to the growing US pressure on Iranian crude exports. Iran had earlier warned in explicit terms that in case Tehran is not allowed to export its crude, exports from other nearby oil-producing states would also be affected.

Yet such public reactions from the Saudi oil minister, announcing to halt the shipments through Bab-el-Mandeb is also being looked at from a different angle.

Under pressure from Washington, Riyadh had no option, but to open its taps. So it did.

Yet, pundits now feel Saudi Arabia is finding it hard to sell the additional crude and that it may have used the pretext of attacks on its VLCCs to slow down crude exports. Quick to ramp up oil output under pressure from the US, Saudi Arabia has discovered that global markets might not need it, at least for now, The Independent reported, citing financial experts.

“(The Saudis) are pushing out a heck of a lot of crude oil right now, and they’re worried about the downward pressure on prices,” Mike Wittner, head of oil market research at Societe Generale SA in New York, told the press.

As Bloomberg reports, Saudi officials are privately fretting they may have opened the taps too quickly. In May, Riyadh’s crude oil production spiked to a three-year high in response to Washington’s insistence on increasing supplies in the wake of its action on the Iranian crude exports. The Paris based International Energy Agency has reported that Iranian oil shipments to Europe have slumped by about 50 per cent in June. Yet, most believe that a more significant demand-supply gap won’t emerge until sanctions enter full force in November. And before that happens, Saudi Arabia is likely to have problems finding buyers for the extra crude.

The problem is being compounded by falling demand for crude in Asia.

Bloomberg’s tanker tracking figures show that since July 1, Saudi oil exports have slumped by about 500,000 bpd to 6.7m bpd compared to June.

In a statement released on Thursday, the Saudi Energy Ministry said that crude exports for the whole of July will be in line with last month’s figures and are expected to decline by 100,000bpd in August.

Saudi Arabia initially planned to reach record output of 10.8m bpd this month, people briefed on production policy said late last month. Yet, that level was always dependent on the strength of domestic and international demand, so could end up ranging from 10.6-11m bpd, they said.

The kingdom in the meantime told fellow producers that output in July will be in line with June’s level of just below 10.5m barrels a day, and not higher, people familiar with the matter were quoted as telling the press.

The impact of US sanctions on Iran’s oil shipments, which remains highly uncertain, will play a big part in determining the final outcome. Since quitting the international nuclear agreement with Iran, the Trump administration has sent conflicting signals, indicating last month that it intended to choke off Iranian crude exports entirely.

More recently, however, officials such as Secretary of State Mike Pompeo and Treasury Secretary Steve Mnuchin have suggested a more flexible approach could be taken.

All this could mean lower additional demand for the additional Saudi crude. Saudi Aramco announcement of halting shipments through Bab-el-Mandeb could also be seen in this perspective.

Published in Dawn, July 29th, 2018