US, UK air strikes on Houthi targets drive up oil prices

Oil prices surge as U.S., UK carry out air strikes on Houthi targets in Yemen

Oil prices saw an increase on Friday following the launch of strikes by a U.S.-led coalition on Houthi rebel targets in Yemen. While the strikes aimed to diminish the threat to international shipping, concerns have also risen over further potential military escalation in the Middle East.

Late on Thursday, U.S. and British forces, with support from Australia, Bahrain, Canada, and the Netherlands, conducted the strikes to disrupt the Houthis' capacity to jeopardize global trade in the Red Sea. These actions were in response to a series of Houthi attacks on vessels in the area, as the Red Sea is one of the world’s most vital waterways. Simultaneously, Iran's navy announced the seizure of an oil tanker off the coast of Oman.

“I will not hesitate to direct further measures to protect our people and the free flow of international commerce as necessary,” U.S. President Joe Biden said in a White House statement.

International oil benchmark Brent crude surged 4.1% to $80.60 a barrel early Friday, while West Texas Intermediate, the U.S. benchmark, rose 4.3% to $75.808 a barrel.

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Red Sea oil supply: Disruption risk currently low, say analysts

The primary concern revolves around a potential significant escalation of violence in the Middle East, heightened by tensions from the Israel-Hamas conflict. Both Iran and Saudi Arabia are major oil producers, and the Houthi rebels, backed by Iran, have previously targeted oil infrastructure in Saudi Arabia.

The seizure of the Iranian tanker occurred near the Strait of Hormuz, a critical chokepoint responsible for transporting over 20 million barrels of oil per day, roughly 20% of global consumption, according to ING.

In a research note on Friday, ING commodity analyst Warren Patterson wrote:

“For now, we believe the risk of significant disruption to oil flows from the Persian Gulf is low, but it is certainly worth keeping an eye on, given the potential impact it could have on oil supply and prices”.

Saul Kavonic, an energy analyst at MST Marquee, shared Patterson’s sentiment in a comment to industry website Rigzone:

“Markets are severely underestimating geopolitical risks to supply, amidst geopolitical risk fatigue. Markets are shrugging off geopolitical risks until there are clear signs of supply actually being impacted.”

Oil price forecast 2024: EIA says downward pressure will dominate despite risks

Oil price forecasts for 2024 have noted that oil and gas prices would likely remain elevated this year due to the geopolitical risks and hardening OPEC+ resolve in maintaining production cuts.

However, not all analysts agree on this. The U.S. Energy Information Administration (EIA) released its latest Brent spot price forecasts in its January Short-Term Energy Outlook (STEO), published on January 12 —

As per the STEO, the EIA anticipates the Brent spot price to average $82.49 per barrel in 2024 and $79.48 per barrel in 2025. The forecast also included quarterly projections:

• $82.97 per barrel in the first quarter of the current year;
• $84.03 per barrel in the second quarter;
• $82 per barrel in the third quarter;
• $81 per barrel in the fourth quarter of 2024 and Q1 2025.

The EIA also forecasts a decline to $80 per barrel in Q2 2025, $79 per barrel in Q3 2025, and $78 per barrel in Q4 2025. According to the agency, falling global oil inventories in Q1 2024 will push Brent prices to an average of $85 per barrel in March.

“Relatively balanced markets for the rest of 2024 with some inventory builds in 2025 put slight downward pressure on crude oil prices through the remainder of our forecast,” the EIA said in the outlook.

“As a result, the average Brent crude oil price falls to $81 per barrel in December 2024 and falls below $80 per barrel in 2H25,” it added.

The STEO also noted the impact of the Red Sea situation on the oil price:

“Heightened tensions around the critical Red Sea shipping channel and other developments in the Middle East have added upward price pressure since early December and have the potential to disrupt global oil trade flows and drives up global oil prices further should they escalate or persist”.

At the time of writing on Friday, the continuous futures contract for Brent crude on the ICE traded 3.24% higher at $79.92, while a similar contract for U.S. benchmark West Texas Intermediate (WTI) advanced by 3.46%, trading at $74.53.

WTI has gained close to 4% since the start of the year, while Brent has gone up by 3.8%.

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