CRUDE markets are fluid and the old mantra is back: Saudi Arabia would respond to customer needs if they want more.

But do they really mean it? Riyadh remains non-committal, keeping in view the November saga.

“Inventories are actually continuing to rise despite what is happening in Venezuela and despite the tightening of sanctions on Iran. I don’t see the need to do anything immediately,” Saudi Energy Minister Khalid al-Falih said in response to queries about Riyadh increasing output.

The kingdom is ready to start pumping more oil (only) if the United States indeed ends the sanction waivers they granted to eight countries last November, Reuters reported, citing an unnamed Saudi source. However, the source clarified; Riyadh will not rush into a reversal of the cuts. It will first examine the effect of the sanction waiver cancellation before it decides how to respond to it.

This is but in sharp contrast to what the United States said while announcing that the waivers given to eight countries were being withdrawn from May. Washington underlined it “had extensive and productive discussions with Saudi Arabia, the United Arab Emirates, and other major producers to ease this transition and ensure sufficient supply.” The United States, Saudi Arabia and the United Arab Emirates ... are committed to ensuring that global oil markets remain adequately supplied,” the White House said in a press statement early last week.

This is a chicken and egg problem. Tougher sanctions on Iran appear contingent on a US understanding that Saudi Arabia and the United Arab Emirates will make up the lost Iranian barrels at least one-for-one to keep prices steady, Reuters reported.

While Washington is publicly insisting on a zero-tolerance policy for Iranian crude exports, the markets also need to cope with the developing situation in Libya. “Libya is the No. 1 wild card.

This sort of makes or breaks the Trump policy,” Helima Croft, global head of commodity strategy at RBC Capital Markets told CNBC. “President Trump cannot afford (at this stage) Libyan production to go off,” she emphasised.

Other variables are also factoring in. Would Iran take the sanctions lying down? That remains a big if. Iran’s supreme leader Ayatollah Ali Khamenei has termed the end of waivers by the United States a “hostile measure” that “won’t be left without a response”. US’s efforts to boycott the sale of Iran’s oil won’t get them anywhere. We will export our oil as much as we need and we intend. They should know that their hostile measure won’t be left without a response, Khamenei said in a tweet.

What Iran could do? There is a possibility that China, Turkey and some other countries would continue buying a smaller volume of Iranian crude. But that would be at a price — as Trump officials including Secretary Pompeo are warning.

And there also exists the possibility of Iran blocking the Straits of Hormuz. This could be a disastrous development. Roughly 20 per cent of all sea-borne crude and condensates traded globally pass through the Strait of Hormuz. Iran will block the world’s most important chokepoint for global oil trade, the Strait of Hormuz, if Tehran is barred from using it to export its oil, Navy Rear Admiral Alireza Tangsiri, Commander of the Islamic Revolution Guards Corps (IRGC), said last week.

For Iran to choke the Strait, may not be easy, yet, it cannot be taken lightly. If it is blocked, it could put into jeopardy, the ongoing Trump endeavours to choke Iran.

Not everyone is taking the threat seriously, saying it was nothing more than incendiary rhetoric.

“Iran’s threat to close the Strait of Hormuz was a reflexive response that we do not take at face value,” analysts at Eurasia Group said in a research note.

“But we have long warned about the Iranian cyber threat, especially the prospect that Tehran could take down Saudi oil infrastructure,” they added. Iran’s ability to close the waterway to traffic is also in doubt because of the presence of the Bahrain based US Fifth Fleet.

Yet Tehran’s threat to disrupt the flow of crude – and the prospect of military action in the region – has the potential to stoke anxiety, experts said, adding to the geopolitical premium on crude prices.

Among potential measures, Iran could mine the waterway or otherwise threaten traffic through the Strait, though such an action would bring a swift response from the US Still, mines would likely take some time to clear, causing turmoil in energy markets that could ripple across other assets.

A high stake game is on, carrying consequences for virtually everyone, including President Trump. The ongoing tug of war is being keenly monitored – all around. An interesting game is on!

Published in Dawn, April 24th, 2019