Economy

How Could US Red Sea Op Affect Oil Prices?

Houthi attacks on trade vessels passing through the Red Sea have sent oil prices higher. Will the rally continue amid the US-led Operation Prosperity Guardian in the region?
Sputnik
Attacks against Israeli-linked ships and the Houthis' determination to proceed with military effort despite the Pentagon's operation to safeguard the sea lane have unnerved international energy firms.
Several companies have paused shipments through the route, sending some of their vessels on the much longer journey around Africa's Cape of Good Hope instead. Around 7-8 million barrels per day (bpd) of crude oil and petroleum products were previously transported via the Red Sea.
On Monday, crude prices went up almost 2% after BP announced it had stopped all transit through the Red Sea and after a Norwegian-owned ship came under attack. On Wednesday morning, Brent crude was trading at $80.20, while West Texas Intermediate (WTI) reached $74.96.
"The continuous barrage activities or what has been happening in the Red Sea and Bab al-Mandab [strait] has already impacted oil prices since earlier this week," Marc Ayoub, a Lebanese energy policy researcher and nonresident fellow of the Tahir Institute for Middle East Policy, told Sputnik.
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"So if we look at the crisis earlier this week, there has been a $2 rise already reaching a barrel of a petrol price of $78 just this week after it reached around $70 or so, $71 or $72 the previous week. So this means that what's happening in Bab al-Mandab and in the Red Sea is impacting slightly until now to the prices, but it is still monitored if you want, or it's still only a $2 increase. So this increase is still manageable for tankers and for companies."
For now, the market has "absorbed" the increase in prices, the expert pointed out.
"I think now it's still manageable, it's still under monitor," Ayoub continued. "But if the hostilities increase, then the activities will have more delays and then we will have more impacts on oil prices. But this has to be monitored. The current disruptions are still within norms or within the orders and the increase is really slight, knowing that Bab al-Mandab accounts for around 12% of all the shipments and the maritime activities, etc."
A more protracted crisis in the region could lead to supply shocks or disruptions, which will in turn cause some additional increases in prices, he said.
That said, the bank estimates that a "hypothetical prolonged redirection" of 7 million barrels per day would raise spot crude prices relative to long-dated prices by $3-4 per barrel.
The Western mainstream press also assumes that record US oil production could balance the disruptions to the oil flow in the Red Sea. As per the US Energy Information Administration (EIA), US crude output mounted to a record 13.3 million barrels per day last week.
Still, the situation could abruptly change if Iran, a Shiite power allied to Yemen, steps in to curtail Washington's pressure on Houthis, according to Ayoub. If the US-led Red Sea operation translates into a wider regional conflict, energy prices would leap up considerably, he concluded.
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