If the geopolitical situation continues to deteriorate, higher oil prices expected

Rashid Husain SyedThe war premium on crude oil prices has finally begun going up.

Oil prices rose for a second week in a row last week and settled at their highest in nearly two months. Brent crude futures rose US$1.12, or 1.4 percent, to settle at US$83.55 a barrel, their highest close since Nov 30. U.S. West Texas Intermediate crude (WTI) climbed 65 cents or 0.8 percent to US$78.01, also the highest close since November.

Until now, crude markets have been largely immune to the growing tension in the Middle East. Not anymore!

Tensions in the Middle East have reached a critical point, causing noticeable disruptions in oil markets. With the outbreak of the Israel-Palestine conflict in early October, crude oil markets reacted but soon went back to normal. The relatively confined nature of the conflict and the substantial spare capacity held by the Organization of the Petroleum Exporting Countries (OPEC) and its allies within the extended OPEC+ alliance played a role in calming market concerns.

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The situation appears to be evolving. Attacks on ships navigating through Bab-al-Mandib, a crucial passage connecting the Indian Ocean to the Mediterranean Sea via the Red Sea and the Suez Canal, have become more frequent. Just last Friday, the British oil tanker Marline Luanda was struck by Houthi missiles in the Gulf of Aden.

U.S. officials told CBS that the tanker was hit by an anti-ship ballistic missile. The UK Maritime Trade Operations (UKMTO) said the incident happened 60 nautical miles southeast of Aden.

After the Houthi attack on the British oil tanker, the U.S. military claimed it destroyed a Houthi anti-ship missile in Yemen that was aimed at the Red Sea and ready to launch. The missile “presented an imminent threat to merchant vessels and the U.S. Navy ships in the region,” the U.S. Central Command said on Saturday in a statement on X.

A British warship, the HMS Diamond, also reportedly repelled a Houthi drone attack on Saturday in the Red Sea, according to British officials.

Houthis have been launching drones and missiles at shipping vessels passing through the Red Sea since Nov 19 in response to Israel’s ongoing military operations in Gaza.

Several other factors contributed to the strengthening of the markets. Oil received a boost earlier due to a larger-than-expected reduction in U.S. crude stockpiles, especially around the WTI delivery point in Cushing, Oklahoma. “Economic stimulus from China, stronger-than-expected fourth quarter GDP growth in the U.S., cooling U.S. inflation data, ongoing geopolitical risks, and the larger-than-expected 9.2 million-barrel drop in U.S. commercial crude stocks for last week have all combined to wedge prices higher,” Reuters quoted Tim Evans, an independent oil market analyst, as saying.

All of these factors are having an impact on the flow of the oil market and its dynamics. And despite assertions that Saudi oil production has remained unaffected by the conflicts, it seems that the situation may be quite the opposite.

While Mohammed Al Qahtani, the head of Aramco’s refining, oil trading, and marketing division, told Bloomberg that Aramco is moving its oil and product cargoes in the Red Sea despite the Houthi attacks on vessels in the region, and they consider the risks to be manageable, his statement contradicts data provided by the shipbroker Xclusiv. According to Xclusiv’s data, deliveries of Saudi Arabian crude to Europe have decreased by 15 percent between December and this month, indicating some disruption to normal shipping routes.

It appears that the oil markets may not yet be fully factoring in the geopolitical risks they face. Many experts have downplayed the effects of the ongoing conflict in Gaza on the region’s oil supply. However, this perception seems to be shifting. If the geopolitical landscape remains unchanged, we may witness sudden increases in oil prices in the near future.

That could be another blow to the Biden administration in an election year.

Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.

For interview requests, click here.

The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.

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