Middle East power play upsets energy, petrochemical markets

Focus article by Muhamad Fadhil

RIYADH (ICIS)–An ongoing tussle for regional influence and power between Iran and Saudi Arabia in the Middle East is causing further instability in the global energy and petrochemical markets, industry sources said on Wednesday.

Their current battleground is Yemen, whose government was toppled in September by Houthi rebels, believed to be backed by Iran.

“The conflict in Yemen is basically a proxy war between Saudi and Iran. The airstrikes are also a show of force by the new Saudi king,” a petrochemical buyer based in the Middle East said.

Yemen, which is located south of Saudi Arabia, does not have a functioning government since September 2014.

New Saudi King Salman bin Abdulaziz, who succeeded to the throne after the death of his half-brother Abdullah bin Abdulaziz on 23 January, has declared a full-scale war against the Houthi rebels, and led an Arab coalition to launch air strikes in Yemen in late March.

On 22 April, Saudi Arabia announced a halt to the airstrikes, but bombings have continued, according to international media reports.

The geopolitical wrangling in the Middle East has been supporting oil prices amid continued concerns over a supply glut and weakening consumption, with US crude trading near $57/bbl and Brent crude hovering at around $65/bbl.

At the roots of the Middle East conflict has been the age-old rift between the Sunnis and the Shiites that divide Islam.

Saudi Arabia, a Sunni Arab country, considers Iran, its largest Shiite neighbour, to be a threat not only to its security but to its crude export business, industry sources said.

The two countries, which are major exporters of crude and petrochemicals, are both members of the oil cartel OPEC.

Iran is currently subject to a host of international sanctions on suspicion that it is developing nuclear weapons, which effectively reduced its crude exports.

In early April, the country has agreed to a deal with world powers during talks in Switzerland, to curb its nuclear program in exchange for some sanctions relief.

A final deal is expected to be hammered out in end-June.

Saudi Arabia, which is the world’s largest crude exporter, is wary about Iran’s return to the market at a time when oil prices are under pressure from oversupply, industry sources said.

Oil prices are currently trading at less than half their values about a year ago amid global economic weakness.

“Oil may yet face price headwinds once Iran comes back,” a petrochemical buyer in Dubai said.

In November last year, Saudi Arabia had prevailed upon other smaller members of OPEC to maintain production, on hopes that the US – its emerging strong rival in the crude export market – would halt production when prices have fallen low enough, industry sources said.

The 12-member OPEC will meet in June to discuss production levels but it remains unclear if the cartel will cut production to prop up oil prices.

With its huge foreign exchange reserves, Saudi Arabia can afford a prolonged period of low oil prices, but not indefinitely – which may just happen when Iran re-enters the international crude market, industry sources said.

“It is in Saudi’s best interest for Iran to remain under sanctions. The new administration in Riyadh is already putting pressure on the US,” according to a source close to a petrochemical producer in Qatar.

In March, an official close to Salman said that Saudi Arabia will not stand back if it turned out that the final deal with world powers allows Iran to develop atomic fuel.

Saudi would seek the same right as its neighbour and may even start to enrich uranium, potentially triggering a nuclear arms race in the Middle East, the official said.

The rivalry between Saudi and Iran has also been also forcing neighbouring countries to take sides, upsetting regional stability, according to petrochemical sources in the Middle East.

“As Sunni Arab countries, UAE and Kuwait are seen to be loyal to Saudi. Iraq is seen to be closer to Iran than Saudi,” a regional energy trader said.

Gulf countries such as the UAE, Oman and Qatar are all concerned about the impact of Iran’s return to the energy markets, the trader said.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections