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Saudi Lifts Its Conflict With Iran To Another Level, Its Missiles To The Houthis “Could Rise To Be Considered As An Act of War”

By Dan Tsubouchi

Brent oil is only up $0.15 to $62.22 as of 10pm MDT and we expect this will go higher once markets turn their focus to Saudi Arabia’s statement this afternoon on Iran/Yemen and away from Saudi Arabia’s arresting of the 50th richest man in the world (Prince Al-Waleed) and dozens of others yesterday.  Also yesterday, the Houthis were able to get a long range missile to reach Saudi Arabia capital of Riyadh and the fallout from that missile is escalating the Saudi Arabia/Iran conflict to another level.   Saudi Arabia says the missiles were Iran manufactured, Iran’s actions were a “blatant act of military aggression by the Iranian regime, and could rise to be considered as an act of war”, reserving their right to “respond to Iran”, and are also closing Yemen’s ports.  This is an elevation from Saudi Arabia and Iran fighting thru surrogates by Saudi Arabia raising the potential of direct action.  Plus the closing of Yemen’s ports will raise the risk for tankers thru the 4.8 million b/d Bab el Mandeb.   We have to believe oil prices will start to show some geopolitical risk premium to Saudi Arabia seeming to take its Iran conflict to another level.  Geopolitical risk has clearly increased in the Middle East today.

A long range Houthis missile reached Riyadh yesterday (Sat).   On Sat, Saudi Arabia confirmed that a Houthis long range missile reached Riyadh.   Saudi Arabia claimed that its patriot missile defense system was successful in shooting down the missile with the missile debris falling around Riyadh’s international airport.   No surprise the Houthis claimed the missile was successful in hitting around the Riyadh airport.  We posted our Nov 5, 2017 Energy Tidbits “Sat Night In Riyadh: Billionaire Prince Arrested, Houthis Missile Threatens Airport and Lebanon PM Resigns”  at noon MDT today and it highlighted the Houthis missile from Sat.   Whether the missile was taken down by the patriot missile defense system or not, it was another example of Houthis having long range missile capability that can reach Saudi Arabia’s major oil infrastructure and its capital.  This is not a new capability but we expect it is getting more attention from Saudi Arabia and the world because the missile reached the capital city and home to the royal family.

Today, Saudi Arabia did what they didn’t do in July – they confirmed there was a long range Houthis missile attack on July 22 at Yanbu.  There was a key new disclosure in today’s statement.   Saudi Arabia noted this was the “most recent”  of the ballistic missiles and that they analyzed yesterday’s Riyadh missile debris, and also the debris from the “missile launched July 22, 2017”.   Prior to today, Saudi Arabia had not confirmed the July 22 ballistic missile attack.  The July 22 missile attack was even more significant to oil markets as it was at Yanbu, the large oil refinery/export terminal for Saudi Arabia on the Red Sea.   We posted our July 25, 2017  blog” “Oil Markets Must Believe The Saudi Aramco Yanbu Refinery Fire Was Caused By Hot Weather And Not A Houthi Missile[LINK]  because markets and western media basically ignored the potential the Houthis were successful in having a long range missile reach Yanbu and penetrate Saudi’s patriot missile defense system.   The reason was that Saudi Arabia did not confirm the Houthis were successful in having a long range missile reach Yanbu and hit at or near a refinery.   Rather Saudi Arabia said the refinery fire that night was caused by hot weather.   Yanbu is probably the 2nd most important oil infrastructure area in Saudi Arabia following its Ras Tanura oil export terminal in the eastern province.  The EIA Country Analyst Brief Saudi Arabia Sept 2014 [LINK] notes the extensive Saudi oil infrastructure in Yanbu in addition to the SAMREF 400,000 b/d refinery.  The EIA notes there is another Saudi Aramco 250,000 b/d refinery, Yanbu Aramco Sinopec Refining Company (YASREF) JV with Sinopec that is 400,000 b/d refinery, and Saudi Aramco’s main export terminal on the Red Sea at Yanbu that can handle 1.3 million b/d.  Plus there is the major Petroline oil pipeline that move oil to the Yanbu export terminal with a capacity of 3 million b/d.  And the parallel 290,000-bbl/d Abqaiq-Yanbu NGL pipeline.

Approx 1,400 Km Range Circle For Burkhan H2 Missile

Source: Google Maps, Stream Asset Financial

But Saturday’s missile at Riyadh was the last straw, Saudi says Iran’s supply of long range missiles to the Houthis is a “blatant act of military aggression by the Iranian regime, and could rise to be considered as an act of war”.   We are surprised that oil prices aren’t higher tonight.  As of 10pm MDT, Brent is only trading up $0.15 to  $62.22.  Earlier this afternoon (2;27pm MDT), the Saudi Press Agency (the official news agency for Saudi Arabia) posted its story “Statement by the Command of the Coalition to Restore Legitimacy in Yemen[LINK].  The statement says Saudi Arabia confirmed the missile that reached Riyadh yesterday was manufactured by Iran, smuggled to the Houthis, is a blatant act of military aggression that could rise to be considered as an act of war and reserves the right for Saudi Arabia to respond against Iran in the appropriate time and manner.  The key parts of the statement are pasted below:

And, after the thorough examination of the debris of these missiles, including the missile launched on July 22, 2017 (Corresponding to 28/10/1438 Hijri) by experts in military technology, has confirmed the role of Iran’s regime in manufacturing these missiles and smuggling them to the Houthi militias in Yemen for the purpose of attacking the Kingdom, its people, and vital interests.

The Coalition’s command considers the Iranian regime’s action in supplying the Houthi militias that it commands with these missiles to be a blatant violation of the United Nations Security Council (UNSC) Resolutions that prohibit nations from arming these militias, specifically UNSC Resolution (2216). Further, Iran’s role and its direct command of its Houthi proxy in this matter constitutes a clear act of aggression that targets neighboring countries, and threatens peace and security in the region and globally. Therefore, the Coalition’s Command considers this a blatant act of military aggression by the Iranian regime, and could rise to be considered as an act of war against the Kingdom of Saudi Arabia, and thus affirms the legitimate right of the Kingdom to defend its territory and people in accordance with Article (51) of the U.N. Charter. The Coalition Command also affirms that the Kingdom reserves its right to respond to Iran in the appropriate time and manner, in accordance with international law and based upon the right of self-defense, including the defense of its territory, its people, and its vital interests, which is enshrined in international agreements and conventions including the UN Charter.”

The Saudi statement is significant because it is elevating Saudi/Iran from fighting thru surrogates to a potential direct conflict:  We believe the above statement is significant because of what says could happen next.   To date, Saudi Arabia and Iran are considered to have surrogates for their respective desire to be the force in the Persian Gulf.   The Houthis are this example, but also Hezbollah in Lebanon. [Note yesterday’s sudden resignation of Lebanon Prime Minister Saad Hariri announced from Riyadh warned Iran about meddling in the affairs of the Arab world and that the region “will rise again and the hands that you have wickedly extended into it will be cut off.“)  Today, Saudi Arabia is saying the are reserving their right to “respond to Iran” ie Saudi Arabia itself potentially responding directly to Iran.

Saudi’s closing of of Yemen’s sea ports has to escalate risk to tankers in the Bab el Mandeb.  The Saudi statement also states “the Coalition’s Command has decided to temporarily close all Yemeni ground, air, and sea ports. These measures will be implemented while taking into consideration the continuation of the entry and exit of humanitarian supplies and crews in accordance with the Coalition’s updated procedures.”  The Houthis do not have a navy that can contend with the Coalition, but can still threaten ships with small boats with explosives, RPGs and others.   Saudi Arabia’s crown prince Mohammed bin Salman (MBS) noted to Reuters [LINK] ““We’re pursuing until we can be sure that nothing will happen there like Hezbollah again, because Yemen is more dangerous than Lebanon. It’s next to Bab al-Mandab so if something happens there, that means 10 percent of world trade stops. This is the crisis.”  The EIA estimates that 4.8 million b/d of oil and liquids flowed thru the Bab el Mandeb in 2016.

We have to believe oil prices will start to show some geopolitical risk premium, following today’s Saudi Arabia statement.  The Saudi Arabia statement is a clear sign that geopolitical risk is increasing in the Middle East.  First is that Saudi Arabia seems to be escalating the conflict with Iran, saying their supplying ballistic missiles to the Houthis “could rise to be considered as an act of war” and their raising the potential that they could take action to “respond to Iran”.   This raises the potential for direct conflicts instead of Saudi Arabia and Iran acting thru surrogates like the Houthis.  Second is Saudi Arabia closing of Yemen ports will raise the risk for tankers thru the Bab el Mandeb.  As of 10pm MDT, Brent is only up $0.15 to $62.22.  The Sunday night business TV news is focused on the Saudi’s arrest of the 50th richest man in the world, and dozens of other prominent Saudi Arabia people.   Once the market turns it focus to today’s statement, we would expect to see geopolitical risk increase in the Middle East and oil increase as the market realizes Saudi Arabia is seemingly escalating its conflict with Iran to another level.