Geopolitical risk has helped push oil prices toward $70 a barrel, but the possibility of supply disruptions arising from political or security issues around the world is still not fully appreciated. A close look at the world’s largest oil-producing countries – outside of the United States – shows geopolitical risks mounting and the potential for serious supply reductions if these pots boil over. Venezuela’s meltdown is the most obvious example and is already priced into oil markets, but political hazards are rising in many OPEC nations, even within the cartel’s de facto leader, Saudi Arabia. The full extent of geopolitical risk, whether it be in the Middle East, South America or North Korea, may not be factored into today’s oil price. This points to more upside for a market that has tightened significantly over the past 15 months under the OPEC-led 1.8 million barrels a day (b/d) cut agreement that runs through the end of the year.
It’s never a picnic in the Middle East, but lately, things are looking dicier than usual. In late March Saudi Arabia was targeted by another barrage of missiles fired by Houthi rebels in Yemen. Although Saudi Arabia shot down the missiles, the attack resulted in the first fatality in the kingdom from its three-year war with Yemen’s Houthis, which Riyadh claims are backed by its arch-rival, Shiite Iran. Oil markets shrugged at the news, but if future attacks target Saudi Aramco oil facilities or the Eastern Province, the main oil-producing region in the kingdom, the reaction is not likely to be so muted. Indeed, the long-standing Saudi-Iran battle for regional hegemony deserves special attention these days, with the two involved in proxy conflicts in Syria and Iraq, in addition to Yemen. Tensions are so high that foreign policy experts are starting to seriously ask what a Saudi-Iran war might look like, and whether a nuclear arms race has already begun in the region.
