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Oil: A Natural Target For Terror Amid Yemeni Houthis’ Ceasefire Offer

Published 29/03/2022, 09:36
Updated 02/09/2020, 07:05

Fresh from their weekend blow-up of an oil depot in Jeddah—a spectacle made all the more audacious by its happening 24 hours before the Formula One race in that city—Iran-backed Yemeni Houthis offer a ceasefire they say could last if Saudi Arabia responds appropriately.

But if history is a guide, then hostilities could resume right after the 72-hour deadline given by the Houthis expires on Wednesday, as the Saudis are unlikely to accept their conditions—a typical situation in the seven-year long war, seen more as a proxy battle between the kingdom and its arch-rival Iran.Oil Daily

The conflict has so far killed tens of thousands of people, mostly civilians, and left millions starving. Violence has worsened in recent months, as have high-profile attacks by the Houthis against Saudi energy installations—after the notorious September 2019 attack on the Abqaiq and Khurais oil processing facilities that knocked out half of the kingdom’s output capacity.

Often, with each attack, crude prices jump between 1% and 3%, and while they sometimes retreat quickly, the damage done to the targeted facilities takes longer to undo, resulting in longer lag times for the industry to regularize supply.

A timeline of the Yemen war shows six previous ceasefires being initiated since the Saudi-led coalition of Arab states—which includes the United Arab Emirates, Egypt, Morocco, Jordan, Bahrain, Sudan, and Kuwait—began the US-backed Operation Decisive Storm in March 2015 in support of ousted Yemeni president Ali Abdullah Saleh.

A History For Yemen Peace That Isn’t Encouraging 

The first ceasefire was in May 2015, when the Saudis and Houthis agreed to a five-day “humanitarian ceasefire” when then US President Barack Obama convened a meeting of the six-state Gulf Cooperation Council at Camp David to resolve the crisis in Yemen. Only two states sent their leaders for that sit-down.

Between October 2016 and May 2017, the United Nations and other groups tried to broker peace talks and political resolutions to the conflict but the Houthis and the Saudi-led side continued fighting, violating the ceasefire supposedly in force then. The Houthis also claimed responsibility then for firing missiles into Saudi Arabia, including at the capital, Riyadh.

In December 2018, after almost four years into the war, and following UN-mediated talks, the Yemeni government and the Houthis signed the Stockholm Agreement that includes prisoner swaps, a mutual redeployment of forces away from the Hodeida Port, and a committee to discuss the contested city of Taiz. The cease-fire was set to take effect on Dec. 18 that year, but the Stockholm Agreement failed to achieve its goals and neither side agreed to withdraw from Hodeida. 

After that came two more occasions, first in March 2020, and later in April-May that year, when the Saudis initiated a unilateral two-week laying down of arms to deal with the COVID-19 outbreak. While Yemen suffered its worst-ever hit from the pandemic at that time, the Houthis and the Saudi-led coalition continued carrying out attacks on each other, ignoring the ceasefire.

In October 2020, the warring sides in Yemen carried out the conflict’s largest prisoner swap. By November, Saudi Arabia and the Houthis had reportedly initiated back channel talks, with Saudi officials indicating their willingness to sign a cease-fire deal and end the Saudi air and sea blockade in exchange for the creation of a buffer zone between Houthi-controlled territory in Yemen and the kingdom’s borders. The Houthis later claimed to have fired a missile at the coastal Saudi city of Jeddah, disrupting that process.

The Present Deal Which The Saudis Are Likely To Reject

Yemen's Houthi group said on Saturday it was suspending missile and drone strikes on Saudi Arabia for three days, in a peace initiative it said could be a lasting commitment if the Saudi-led coalition fighting in Yemen stopped airstrikes and lifted port restrictions.

The group will suspend for three days its ground offensive operations in Yemen, including in the gas-producing region of Marib, said Mahdi al-Mashat, the head of the Houthis' political office. "This is a sincere invitation and practical steps to rebuild trust and take all the sides from the arena of talks to the arena of acts," Mashat said.

Lifting restrictions imposed by the coalition's warships on Yemen's Red Sea ports has been a major Houthi condition for a ceasefire. Saudi Arabia says there is no blockade on the ports and that it is only preventing arms smuggling.

Saturday's initiative would last if the coalition reopened the ports and stopped its airstrikes, Mashat said, adding that the group would extend the suspension of ground operations if Saudi Arabia announced a withdrawal of foreign troops from Yemen and stopped backing local militias.

It is unlikely that the kingdom would agree to such conditions, as Riyadh seeks an inclusive ceasefire simultaneously with reopening the ports and Sanaa airport.

The latest ceasefire offer has “led some (to) speculate that the Iranians (are) doing this to smooth the way ahead for the(ir) … nuclear talks,” wrote Phil Flynn, energy analyst at Chicago’s Price Futures Group, in a commentary issued on Monday.

Right after the weekend attack on its Jeddah oil depot,  Saudi Arabia warned that it cannot bear responsibility for any shortage of oil supplies to global markets, in light of the continuing attacks against its energy facilities. The kingdom also said the international community needs to realize the role of Iran in supporting Yemeni Houthi rebels to target oil and gas production sites.

Saudi Arabia’s fuming over Iran’s likely hand in the attack on its energy sites is bearing more pressure on world powers to discipline Tehran — even as they struggle to conclude their 2015 nuclear deal with the Islamic Republic.

It’s no secret that the Saudis don’t want the nuclear deal—originally signed in 2015 under the Obama administration and in force till the Trump administration canceled it in 2018—to be revived now by the Biden administration. The Saudi argument is that Iran, free from US sanctions on its oil, would use the proceeds from that to fund further terrorism against the kingdom.

The negotiations between the world powers and Iran have already dragged on for 11 months and are on the verge of finally going through or collapsing altogether. 

Why Oil Will Remain A Favorite Target For Terror

As such, the Houthi overture at peace appears timed to cool heads simmering after the Jeddah attack and to bring the focus of negotiators back to the nuclear deal, which Iran really wants but is too proud to beg for, says John Kilduff, founding partner at New York energy hedge fund Again Capital.

“It’s no coincidence that oil is always under attack at the worst possible moment — like now, when it is in such short supply — because the attackers want to make a high profile political statement, and which other commodity allows them to do that with the kind of impact that oil has?” said Kilduff. 

He added:

“Whether it’s the Boko Haram rebels who once terrorized Nigeria, the Iran-backed Houthis now fighting the Saudis or Russia’s Putin against Europe, all have weaponized oil and energy to achieve what they want.”

“Therefore, this won’t be the last ceasefire or the last attack on oil.”

David Cook, an associate professor at Rice University, concludes as much in his thesis on oil and terrorism which he says is at the forefront of the geopolitical and financial risk in the global energy market. He wrote:

“As oil is one of the major resources if not the major resource of some of the dominant Muslim countries, it is critical for radical Islamic groups to both deny their own governments (against whom they are rebelling) the revenues derived from oil, as well as create a sense of crisis in the world oil market that terrorist attacks can generate.” 

The paucity of natural resources in the Middle East other than oil and the exclusive dependence upon hydrocarbon revenues means oil-rich Muslim countries can be destabilized through attacks upon the oil infrastructure, he said. 

“Additionally, for radical Muslims, the fact that such a high percentage of the revenues derived from oil go to non-Muslim, multi-national corporations is enraging, and the additional fact that many of the oil workers and their dependents are non-Muslim and constitute a dilution of the Muslim character of their societies is doubly grating,” wrote Cook. “To lose the money (as they see it) and be subjected to cultural invasion at the same time constitutes a strong enough provocation to attack.”

As an economically-exploitable commodity, oil is vulnerable, with its infrastructure usually concentrated in a few places within a given country, Cook said.

He adds:

“While this fact makes protecting it theoretically easier, it also ensures that if an attack is successful, the destruction can have wide-ranging consequences. Additionally, the volatility of the oil market makes it particularly vulnerable to any threats—real or imagined.” 

Therefore, even a failed hit or one on a subsidiary part of the oil industry (e.g., an oil tanker on the high seas) can have ramifications far beyond the actual importance of the event by raising oil prices or causing the market to fluctuate. All of these subsidiary elements within the oil industry—oil tankers, refineries, storage areas, headquarters of companies, quarters for oil workers, etc—cannot be protected on a permanent basis.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

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