Latest escalations in violence by Iran’s proxies threaten huge spikes in oil prices

A series of intense military exchanges between the Iran-backed Hezbollah terrorist organization and Israel over the weekend aligns with the Islamic Republic’s intention to maintain pressure on Israel and its key Western allies through multiple indirect mechanisms rather than direct action by Iran. a senior source in the European Union (EU) energy security complex exclusively said OilPrice.com. “Sunday’s (August 25) incidents involving Hezbollah and the previous weeks when the Houthis stepped up attacks in the Red Sea signal the main way Iran plans to retaliate for recent Israeli attacks on it and its proxies,” he said. “Using Hezbollah and the Houthis to carry out such strikes puts some distance between Iran and Israel so as not to directly provoke Israel’s key sponsor, the US,” he added. “However, despite the attacks coming from Iran’s proxies rather than the sponsor itself, the situation is likely to spiral from here, and Hezbollah has already said its recent (Sunday) attacks are only the first phase of his response to the assassination of his top commander, Fouad Shukr (in a strike in Beirut on July 30), which he believes was carried out by Israeli forces,” he stressed.

The scale of Israel’s preemptive strike on Hezbollah’s Lebanese bases is the largest seen since the all-out war between Israel and Hezbollah in 2006, and a further escalation would pose far greater problems for Tel Aviv than its ongoing war with another Iranian terrorist group. , Hamas. Hezbollah is on another level altogether, with around 100,000 in its fighting force, a huge arsenal of weapons, including up to 200,000 missiles and rockets, all positioned directly in northern Israel. It is also a key recipient of Iran’s aid in training its fighters and providing short-, intermediate-, and long-range unguided ballistic missiles and short-range guided ballistic missiles capable of hitting all of Israel’s major population centers. The history of the war against Israel stands out as a unique success among its Middle Eastern neighbors, having driven Israeli forces out of Lebanon in 2000 and fighting them again in 2006, at that point in a stalemate. A full mobilization of Hezbollah against Israel, at the same time as the ongoing conflict on another front against Hamas, could significantly stretch Israel’s defense capabilities – even more so if they are augmented by airstrikes on Israel by Iran or additional forces from Syria to northeastern Israel supported. by the Iranian military and its proxies. “It’s another element of threat thrown into the mix, as another war with Hezbollah could draw other anti-Israeli fighters from across the region, encouraged or not by Iran, with all the potential for increased superpower involvement that this entails, ” said the EU security source.

Related: Oil prices rise as geopolitical risk rises rapidly

At the same time, attacks against oil shipping in and around the Red Sea area are likely to be stepped up, he believes. Less than a week ago, the Greek tank Sunion and another, as-yet-unnamed vessel, were attacked, mirroring actions taken by naval elements of Iran’s Islamic Revolutionary Guard Corps (IRGC) that preceded Hamas’ October 7, 2023 attacks on Israel. In early May 2023 in and around the Strait of Hormuz, Iranian forces seized two oil tankers in one week, although neither Niovi nor the Sweet advantage had any direct connection with Israel. Instead, the EU source exclusively told OilPrice.com at the time, this was done to demonstrate that the Islamic Republic still has control over the key transit route, which sees around 30% of the world’s oil transported through it. As a result of these two confiscations, oil and shipping insurance prices rose, albeit temporarily, as they did after the November 19, 2023 hijacking of Galaxy leader by the Houthis. However, it was interesting to note even then that oil price developments were limited, despite threats from Houthis spokesman Alameed Yahya Saree at the time that the group intended to “sink” Israeli ships in the Red . Great. The same can be said about the August 21, 2024 attacks on shipping.

In part, this was due to the avoidance of the area by many major oil companies who decided to use the longer Cape of Good Hope route instead. In part, this can be attributed to increased security in the region’s waters by the US and its allies late last year, in the form of “Operation Prosperity Guardian”. This multilateral naval task force was designed precisely to protect against such future Iranian or Houthi attacks on oil shipping in the Red Sea region. Indeed, IMF PortWatch data shows that average daily vessel transits through the Bab al-Mandab Strait on the Red Sea route were 23 in the week ending August 11, 2024, compared to 70 on the same day last year. Along with these have come China’s efforts to mitigate a sustained escalation of attacks in the region, either directly from Iran or from its Houthi proxies. Ago “Iran-China Comprehensive 25-Year Cooperation Agreement”as first revealed anywhere in the world in my September 3, 2019 article on this topic, and as fully analyzed in my latest book on the new global oil market order, Beijing exerts enormous influence over Tehran. Through this and other similar deals in the region, China holds sway over the Bab al-Mandab strait, through which crude oil is transported up through the Red Sea to the Suez Canal before moving into the Mediterranean and then west.

Crucially in the oil market, the US and China share a desire to keep prices historically low. As I thoroughly discussed in my latest book on the new world oil market order, prices above $75-80 a barrel significantly increase the chance that the US economy will go into recession. Historical precedent has been that every $10 per barrel change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline increases, more of $1 billion a year in consumer spending is lost. And if the US economy is in recession two years after a major election (presidential or midterm), then the chances of the party in power winning are dramatically reduced. Since the end of World War I in 2018, the sitting US president has won re-election only once in seven such occasions (and even one is debatable). Meanwhile, China has been the world’s largest crude importer since 2017, which remains key to fueling its economic recovery still reeling from the devastating Covid period. Furthermore, it is important for Beijing that the economies of the West remain its key export bloc. According to the EU source, the economic damage to China – directly through its own energy imports and indirectly through damage to the economies of its key export markets in the West – would increase dangerously if the price of Brent remained above USD 90-95 per barrel. for more than a quarter of a year.

However, Iran may believe that further escalation by its proxies is the optimal way to respond to the recent series of Israeli attacks on it, regardless of pressure from China. Supporting Hezbollah in larger attacks against Israel would be one such method of doing so, as would increasing Houthi-led aggression against Western shipping in and around the Red Sea. Another would be to use the Houthis to launch attacks on key Saudi oil facilities. The last time the Houthis launched major coordinated attacks against mainland Saudi Arabia – on September 14, 2019 against the Abqaiq oil processing facility and the Khurais oil field – Saudi Arabia’s oil production was cut in half, causing the largest daily increase in US dollars since 1988. , as fully analyzed in my new book on the new global oil market order.

Exactly what such actions could mean for oil prices was defined by the World Bank shortly after the October 7 attacks by Hamas. It said a “small disruption” – with global oil supplies being cut by 500,000 to 2 million bpd (roughly the same as the drop seen during the Libyan civil war in 2011) – would lead to oil prices initially rising by 3-13%. An “average disruption” – involving a supply loss of 3 to 5 million bpd (roughly equivalent to the 2003 Iraq War) would increase oil prices by 21-35%. And a “big disruption” — with a drop in supply of 6 million to 8 million bpd (like the drop seen in the 1973 oil crisis) — would send oil prices up by 56-75 percent.

By Simon Watkins for Oilprice.com

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