Oil prices experienced a notable increase of more than a dollar per barrel on Tuesday, building on the gains from the previous session. The surge followed attacks by Yemen’s Iran-aligned Houthi militants on ships in the Red Sea, disrupting maritime trade and leading several companies to reroute vessels.
Brent crude futures saw a rise of $1.28, equivalent to 1.6%, settling at $79.23 a barrel—the highest level since December 1. Simultaneously, U.S. West Texas Intermediate crude futures for January delivery, expiring after Tuesday’s settlement, increased by 97 cents or 1.3%, settling at $73.44 a barrel, marking the highest point in over two weeks.
In response to the heightened tensions, the U.S. announced the establishment of a task force aimed at safeguarding Red Sea commerce from potential attacks by Iran-backed Yemeni militants. Despite this initiative, the Houthis have vowed to defy the U.S.-led naval mission and continue targeting Israeli interests in the region.
The uncertainty surrounding the duration of these events has unnerved the market, with major shipping firms opting to steer clear of the affected areas. The disruptions in the Red Sea have escalated geopolitical risks, prompting traders to assess the potential for supply disruptions.
Monday’s oil price surge of nearly 2% was triggered by an attack on a Norwegian-owned vessel, leading BP to announce a suspension of all transit through the Red Sea. Subsequently, several other shipping companies made similar announcements.
Approximately 12% of global shipping traffic passes through the Red Sea and the Suez Canal, underscoring the significance of the region for maritime trade.
Rob Thummel, Managing Director at energy investment firm Tortoise Capital, commented on the situation, stating, “This is causing oil prices to move higher as traders assess the potential for a supply disruption tied to increasing geopolitical risk.
While the attacks have heightened the risk premium in oil prices, some analysts suggest that the current impact on oil supply is limited. Oil continues to flow, albeit with longer journeys resulting in higher transportation costs.
Goldman Sachs analysts echoed similar sentiments, indicating that the disruption is unlikely to significantly impact crude and liquefied natural gas (LNG) prices. The ability to reroute vessels suggests that production should not be directly affected.
Additionally, market participants are closely monitoring the latest U.S. supplies data. The initial report from the American Petroleum Institute (API) indicates an increase in U.S. crude oil and fuel inventories, while official U.S. stocks data from the U.S. Energy Information Administration (EIA) is scheduled for release on Wednesday at 10:30 a.m. ET. Analysts anticipate a decline in U.S. crude oil inventories for the last week, providing further insights into U.S. fuel demand and refinery output as 2023 concludes.