Attack on Saudi tanker signals escalation in Yemen war, and it could mean higher oil prices

  • The Houthi attack on a Saudi Arabian super tanker this week signals further escalation of the conflict in Yemen.
  • Saudi Arabia's energy minister said the attack was a desperate effort and it would not disrupt oil supplies.
  • Analysts say oil prices do not reflect much of a geopolical premium and could go higher if Houthi efforts to hit Saudi's oil sector continue.
An oil site in the middle of the Rub' al Khali desert, Saudi Arabia.
Reza | Getty Images
An oil site in the middle of the Rub' al Khali desert, Saudi Arabia.

An attack on a Saudi super tanker by Yemen's Houthis this week signals further escalation in the efforts to take the war in Yemen directly to Saudi Arabia and its oil facilities.

Saudi Arabia entered the war three years ago, but the proxy battle between it and Iran has so far not added much of a premium to the price of oil. However, that could change if the Iranian aligned Houthis are more successful in their attacks on Saudi Arabia and its oil facilities.

"This could eventually prove to be the tripwire for a direct confrontation between Saudi Arabia and Iran," said Helima Croft, head of global commodities strategy at RBC. Crown Prince Mohammed Bin Salman led the kingdom into the regional war after the Houthi rebels forced Yemen's president Abd Rabbu Mansour Hadi into exile.

"Imagine if that tanker was seriously damaged. Is this going to start a tanker war situation? I worry about this not being a one off and there becomes concerns about the security of the straits. They just had a missile strike on Riyadh a week ago," Croft said.

John Kilduff of Again Capital said oil did not jump on news of the attack but it did hold up during a sell off in global risk assets Tuesday. West Texas Intermediate crude futures were trading up about a half percent at $63.67 per barrel in late trading Wednesday afternoon.

"The most recent run to $66 was when the rockets had come out of Yemen to the Riyadh airport," Kilduff said. "The Saudis aren't going to take much more of it. Their patience has to be running out."

Saudi Energy Minister Khalid Al-Falih attempted to calm the market, with a tweet on Wednesday, saying the attack was a desperate attempt that will not stall oil supplies.

The Saudi tanker Abqaiq came under fire Tuesday west of Hudaidah in the Red Sea, while it was enroute to Egypt's Ain Sukhna. The tanker, carrying 2 million barrels of crude in a key shipping lane, was reported to have dropped anchor in the Red Sea, with its destination still listed as Egypt, according to S&P Global Platts.

According to Reuters, the Houthis said they had targeted a warship in response to an air strike that killed civilians.

The attack follows an episode March 26 where the Houthi fired a barrage of missiles into Saudi Arabia on March 26. The Saudis intercepted seven missiles, but one person was killed by debris.

Kilduff said the attack on the tanker takes the assaults to a new level and could be the beginning of a new effort to disrupt oil transport. A year ago, Saudi forces stopped an effort to blow up an Aramco fuel terminal, allegedly planned by Houthis, using a high speed boat filled with explosives.

"It highlights a vulnerability. I think the only reason they haven't reacted yet is because MBS [the crown prince] is in the United States. Once he gets back, you could see a ramp up," he said.

MBS has been meeting with business leaders and met with the Trump administration in a tour across the U.S. The prince is leading an effort to attract new investment to Saudi Arabia and diversify the kingdom away from oil.

The attack also comes as the Trump administration is taking a more hawkish tone against Iran, with the appointment of John Bolton as national security advisor.

Bolton, a former U.N. ambassador, has said the U.S. should act pre-emptively against North Korean and Iranian nuclear programs, and his arrival makes it more likely the U.S. will drop out of the Iran nuclear deal.

"The addition of John Bolton only raises the stakes further," Kilduff said. "It raises the risks for a direct conflict."

The White House said it was concerned by developments and called on the Houthis to cease further escalation and engage in peace talks.

WATCH: Kilduff on geopolitical uncertainty