Saudi Arabia and Iran are moving closer to a direct military confrontation that has the potential to disrupt Middle East oil supplies and push crude oil prices back towards the $60, even $100, level.
That’s a dream scenario for American frackers who will have to pump oil as fast as they can to make up any supply shortfall to America’s allies.
For several years, Saudi Arabia and Iran have been trying to resolve their religious and political differences by fighting proxy wars that had little impact on oil prices. For a simple reason: they didn't want to cause any disruptions in the flow of oil from the Persian Gulf. Besides, Washington has been the de facto guarantor of the free flow of oil from the Gulf to its Asian and European allies.
Recently, there are signs that the two adversaries are moving closer to a direct war, however, raising the possibility of a “military accident”in the Persian Gulf. That could disrupt Middle East oil supplies, sending oil back to $60 or even $100 in a matter of months, if not weeks.
“In case there is ‘a military accident’ in the Arabian Gulf, the oil supply route could be seriously disrupted,” says Athens based shipping expert Theo Matsopoulos. “When the markets are in critical point they are more sensitive and they translate facts more violently than they would during times of stability. It is not necessary for the Strait of Hormuz to be fully blocked, as happened in the Suez Canal in 1956. The expectation of a blockade and the potential for disruption could cause turbulence and shape a bullish market for crude oil. All of the affiliated parties will need to be hedged and they will start buying long positions, inflating the price to levels above $60/barrel.”
That's certainly a dream scenario for American frackers, as they will pump oil as fast as they can to fill in the gap generated from the shortfall in the middle supplies.
“The biggest gainers will be the US frackers,” says Matsopoulos. “With an extremely wide break-even range from $32 to $55 per barrel, an increase in the oil price to levels higher than $50 will make the overwhelming majority of them smile. The US will soon be able to finance its trading deficit and solidify even more its position as a major oil exporter. The longera potential crisis in the Middle East lasts, the more the market share of the US companies will increase -- because apart from prices and commodities the political stability of the USA can act as a guarantee for a smooth supply of oil for many consumers.”
That’s why Washington may do little if anything to stop a direct war between the two old adversaries. And Russia may go along with this scenario, as higher oil prices will benefit its own oil producers.
Paradoxically, a direct war will benefit the Saudi Kingdom, too. Higher oil prices will pave the way for its Aramco IPO; and give a very much needed break to its over-exploited oil wells.
Still, an outright war carries high risks for both Saudi Arabia's and Iran's regimes, especially if it involves many casualties. That makes the scenario possible but not probable, at this time.