CRUDE geopolitics is on a roller coaster. Fireworks have begun. Yet despite fears of supply disruption, prices have not spiked to the extent it used to in the past. That is an interesting development indicating the growing disconnect between the two – an apparent sign of the new, emerging, crude world order.

In the first signs of the escalating tension, four oil tankers were attacked last Sunday, near the Fujairah port in the UAE, just outside the strategically important Strait of Hormuz. Iran was a prime suspect in the sabotage. However, as per some media reports, Washington had no conclusive proof of it. Iran has also denied involvement and described the attack as “worrisome and dreadful”, calling for an investigation.

And then last Tuesday in coordinated attacks on the oil infrastructure, drones originating from Yemen struck Saudi Arabia.

In a statement, Saudi Energy Minister Khalid al-Falih said the drones attacked a petroleum pumping station supplying a pipeline running from its oil-rich Eastern Province to the Yanbu Port on the Red Sea.

The Kingdom’s state security body said two petroleum pumping stations in the greater region of Riyadh were targeted at the same time. Saudi Aramco had to temporarily suspend operations after the strikes.

Drawing support from the possibility of active conflict in the oil-rich, Middle East, crude prices inched up. Scenes of helicopters carrying US staff from the US embassy in Baghdad, apparently out of concern over perceived threats from Iran, also helped to strengthen the crude markets. In the process, markets brushed aside rising US crude inventories that last week, touched the highest mark since 2017.

Interestingly the price spikes have not been spectacular, as in similar circumstances in the past.

Prices went up and then gave up the rise. The debate is on; why?

Indeed the oil dynamics have changed substantially over the past few years. Rising conventional and non-conventional output appears to be reshaping the energy horizon.

Ellen R. Wald, writing for Investing.com, emphasised that despite the rising tensions in the Persian Gulf, the announce­ment from the US that it is beefing up its naval and air force presence in the region and evacuating unnecessary personnel from Iraq, the escalating rhetoric from Iranian leadership, oil markets, which have traditionally been sensitive to potential conflicts in the region, have not been reacting very strongly to this news.

On Sunday, when four oil tankers were “sabotaged,” oil prices only went up by 2 per cent before those gains were quickly erased.

On Tuesday morning when the two pump stations along the pipeline that traverses Saudi Arabia were attacked by armed drones, prices climbed 1.5pc. Yet most of those gains were gone by the close of trading Tuesday. Oil markets apparently were not paying much heed to the growing chorus that the US and Iran are getting closer to an armed conflict.

Wald feels there are reasons for that. Although the damage reported in both the attacks made global headlines, in reality they were minor and did not impact oil production or exports.

None of the four boats that suffered damage were carrying any oil. Satellite images obtained by the Associated Press after the attack did not show any major visible damage to the vessels. The damage to the pump stations was also minor and the pipeline resumed normal operations the next day.

Rather the markets appeared more concerned about the impact of the ongoing trade war between China and the US. Though negotiations have not broken down, an agreement has not been reached either. The concern is that the trade war could usher in a recession that will depress oil demand, Wald underscores. These concerns are weighing more heavily on traders’ minds than any sabre-rattling in the Persian Gulf.

Concerns about demand also seem real. An Opec report forecasts, oil demand in 2019 will be only 1.21 million barrels per day (bpd) higher than in 2018.

On Wednesday, the IEA too released its forecasts for demand growth and reduced it by 90,000 bpd to only 1.3m bpd.

Markets are also not sure of the next move of the Organisation of the Petroleum Export Countries (Opec)s. Will they open taps or not, remain a key question.

This is a different era. Market fundamentals have changed. The Middle East is not the sole driver of the markets. Hence despite the flare-up, there is a subdued response from the markets.

This is not only different from the past in some re­­spects, but it is refreshing too.

Published in Dawn, May 19th, 2019