Middle East’s widening fault lines threaten further energy turmoil

Rising tensions in the Middle East are threatening to further destabilise global energy security.

As Iran presses ahead with its nuclear program, and the US responds with new sanctions, the geopolitical landscape looks similar to the second half of 2019. Then, Iran responded to growing sanctions pressure with frequent covert military action against energy infrastructure and shipping in the region.

Now, the stakes are higher. Tehran’s breakout time – the time required to accumulate enough uranium for one nuclear bomb – has been reduced to a matter of days. The rhetoric between Riyadh and Tehran is also getting sharper, and the imminent return of Benjamin Netanyahu to power in Israel threatens to shift Israel-Iran tensions from bad to worse.

Increasing friction along these fault lines carries the risk of more frequent attacks against energy infrastructure and shipping, while a broader regional confrontation could have wide-reaching consequences for the global oil market.

Washington and Tehran on a collision course over Iran's nuclear program

Data from our Interstate Tensions Index shows that tensions between the US and Iran are at a two-year high and on a negative trajectory. Widespread anti-regime protests across Iran have made a nuclear agreement a remote prospect, as a familiar pattern of US sanctions pressure and Iranian counterpressure returns.

Iran is pushing back against sanctions on two fronts. First, by advancing its nuclear program. And second, by demonstrating its ability to target energy infrastructure and shipping in the region.

On the nuclear front, the announcement on 22 November 2022 that Iran had started enrichment to 60% purity at the underground Fordow facility marked the latest serious violation of the 2015 nuclear agreement (JCPOA). Enrichment at Fordow is of particular concern as the JCPOA seeks to not only limit enrichment to 3.57%, but also restrict any enrichment to facilities that would be vulnerable to a military strike in the last resort.

The drone attack against an oil tanker off the coast of Oman on 15 November 2022 was another reminder that Iran still has the capability to carry out attacks with plausible deniability. Iran has so far managed to skirt US red lines and narrowly avoided direct retaliation during the Trump administration. Tehran’s aim will again be to cause maximum disruption in the global oil market without triggering a direct military response from the US. But amid heightened tensions across the region, the risk of miscalculation is getting higher.

Relations between Riyadh and Tehran on a negative trajectory

Tentative diplomatic efforts between Saudi Arabia and Iran over the last three years have amounted to little. And as Tehran accuses Riyadh of supporting ongoing anti-regime protests in Iran, relations are on a clear negative trajectory. The end of the ceasefire in Yemen in October is another risk factor, as Iran could easily put Saudi Arabia and the UAE under pressure through renewed Houthi drone and missile attacks from Yemen. As Figure 2 shows, Iran’s ability to export its drone and missile capabilities to regional proxies has exposed the vulnerability of Saudi energy infrastructure and international shipping in the region.

Saudi warnings of an 'imminent' Iranian attack in early November have soured relations further. The warning was assessed as credible by the US, prompting an increase in the US military’s alert level in the region. It is likely that the Saudi warning compelled Iran to call off or postpone the attack. Tehran has relied on at least a degree of plausible deniability when targeting Saudi Arabia and the UAE in recent years; an attack immediately following Riyadh’s warning would increase the risk of US retaliation.

The flight of two US B-52 bombers over the Persian Gulf after the Saudi warning will have been designed to allay fears in Riyadh that Washington isn’t doing enough to deter Iran. But with US-Saudi relations under growing pressure, Iran is more likely to assume a more assertive stance.

Iran-Israel shadow war set to intensify

The Verbal Tensions indicator of our Interstate Tensions Index shows that negative exchanges between Iran and Israel have remained high throughout 2022. This is unsurprising, as they are locked in a shadow war across the Middle East. Iran targets Israeli shipping interests and funnels arms to Lebanon-based Hezbollah via Syria. Israel also targets Iranian shipping and launches airstrikes on Iran-linked targets in Syria. Covert sabotage of Iranian nuclear facilities and assassination of Iranian officials is frequently tied to Israel.

These tensions are set to increase further. Continued Iranian enrichment activities make this inevitable, as Israel views a nuclear-armed Iran as an existential threat. A harder Israeli line on Iran is also to be expected once Benjamin Netanyahu returns to office after victory in recent elections. The outgoing government was hardly soft on Iran, although its recent maritime boundaries deal with Lebanon was lambasted as a 'historic surrender' to Iranian ally Hezbollah by Netanyahu. Netanyahu is unlikely to withdraw from the deal once he takes office – to do so would rock relations with the US – but further diplomatic rapprochement with Lebanon is off the agenda.

Instead, sabotage of Iranian nuclear facilities is likely to increase in frequency, while Netanyahu will step up threats of direct airstrikes to disrupt or destroy Iran’s nuclear program.

Middle East risk premium likely to rise further

The negative outlook across the region’s main geopolitical fault lines is bad news for major oil and gas consumers still concerned about insufficient supply. The last three years have shown that minor temporary disruptions are manageable, and to a great extent priced in by the market. But with higher average brent crude prices and less spare capacity than in 2019, there is now less room for error. If the frequency and severity of attacks against energy infrastructure and shipping increase over the coming months, the Middle East risk premium in the global oil market is likely to soar.

Hamish Kinnear

MENA Analyst, Risk Insight

Torbjorn Soltvedt

Principal Analyst