Red Sea Violence Ignites Oil Price Surge, Global Supply Fears

Clear Facts

• Oil prices surged past $80 per barrel for the first time this year due to escalating violence in the Red Sea, causing vessels to alter their course and sparking fears of a wider disruption.
• The price increase followed a series of targeted airstrikes by the US and Britain against Houthi sites in Yemen, in response to weeks of rebel attacks on ships passing through the Suez Canal.
• The ongoing conflict has led to a significant decrease in the number of vessels entering the Red Sea, with shipping companies opting for alternative routes that are more time-consuming and costly.

Oil prices soared past $80 per barrel on Friday, marking the first time this year that such a price point has been reached. The surge was triggered by escalating violence in the Red Sea, which has forced more vessels to change their course and has ignited fresh fears of a broader disruption.

International benchmark Brent crude and U.S.-based West Texas Intermediate each saw a jump of more than 4%, reaching as high as $80.57 per barrel and $75.07 per barrel, respectively. This price hike comes in the wake of targeted airstrikes conducted by the United States and Britain against Houthi sites in Yemen. These strikes were in retaliation for weeks of violence instigated by rebels against ships attempting to traverse the Suez Canal, a crucial international waypoint for oil and liquefied natural gas shipments traveling from the Persian Gulf to Europe and North America.

President Joe Biden made a statement regarding the strikes, saying, “These targeted strikes are a clear message that the United States and our partners will not tolerate attacks on our personnel or allow hostile actors to imperil freedom of navigation.” He further added, “I will not hesitate to direct further measures to protect our people and the free flow of international commerce as necessary.”

Earlier this year, the U.S. announced the creation of “Prosperity Guardian,” a multinational effort aimed at ensuring freedom of navigation in the Red Sea. This initiative comes as a response to the attacks and retaliation following the targeting of commercial ships by Iranian-backed Houthi rebels. These rebels have been targeting ships passing through the Bab al-Mandab Strait to the Suez for the past four weeks, posing a threat to the transport of key goods, including energy products.

The Energy Information Administration reports that more than 12% of total seaborne oil shipments and 8% of LNG shipments passed through the Suez in the first half of 2023. Europe, which heavily relies on the Suez for energy supplies, could bear the brunt of any delays caused by the conflict.

The attacks have already compelled many commodities shippers in the Suez to either temporarily halt shipments or reroute them around Africa’s Cape of Good Hope. Companies such as Danish shipping giant Maersk, BP, Germany’s Hapag Lloyd, and Norway’s Equinor have all announced plans to reroute via Africa in recent weeks, citing the deteriorating security situation.

On Friday, the Combined Maritime Forces group, led by the U.S. in Bahrain, issued a warning to all ships to “stay well away” from the Bab al-Mandab Strait, according to a note from the trade group Intertanko. The ongoing violence in the Red Sea has sparked new concerns about a broader conflict that could cause widespread disruption to shipping firms and commodities markets.

The number of vessels entering the Red Sea has decreased by approximately 50% year-on-year in the first week of January. However, the alternative for shipping companies, which involves traveling around the Cape of Good Hope, results in longer transit times and significantly higher costs.

Data shared by the shipping logistics firm Container XChange with the Washington Examiner on Friday reveals that on average, shipments around Africa take 10-20 days longer than using the Suez, and costs are nearly three times higher. The firm anticipates shipping costs to increase up to 60%, coupled with a 20% increase in insurance rates, in the coming weeks as the crisis continues to unfold.

The recent attacks have also raised the specter of a broader, more protracted conflict in the Red Sea. This could be particularly dangerous if tensions escalate beyond the Suez and into the Strait of Hormuz, the world’s most important oil chokepoint that moves more than 20 million barrels of oil per day (or 20% of global consumption), from the Persian Gulf.

In a related development, Iran announced on Thursday that it had seized an Iraqi crude oil tanker near the Strait of Hormuz that was destined for Turkey. However, it remains unclear whether this incident is related to the ongoing conflict. Any provocation in this area would be a major escalation, locking in valuable exports from Saudi Arabia and other Middle East producers.

Even without considering Iran’s seizure, the prospect of higher prices and more supply chain delays due to the Red Sea disruption is almost inevitable, at least in the near term. ING expects continued shipping and price impacts through the second half of 2024 as a result of the sustained violence. “Risks are unlikely to disappear anytime soon amid intensified incidents, the ongoing war in Gaza and associated geopolitical tensions in the Middle East,” analysts said in a research note on Friday.

While ING believes the risk of significant disruption to oil flows from the Persian Gulf is “low” for now, it said, “it is certainly worth keeping an eye on, given the potential impact it could have on oil supply and prices.”

Clear Thoughts (op-ed)

The current surge in oil prices, catalyzed by escalating violence in the Red Sea, is a stark reminder of the delicate balance of global affairs and the vulnerability of our energy markets. While President Biden assures us that the targeted airstrikes against Houthi sites in Yemen are a clear message to hostile actors, it seems we’re only playing a game of Whac-a-Mole in the Middle East.

The Red Sea conflict isn’t merely a localized issue; it’s a global disruption, affecting even the most mundane aspects of everyday life. The shipping companies’ choice to reroute around Africa’s Cape of Good Hope may seem a minor inconvenience, but it’s a decision that carries significant economic weight, increasing transit times and costs.

As the conflict continues, we’re witnessing a broader, more protracted conflict that threatens the world’s most important oil chokepoint, the Strait of Hormuz. The threat of higher prices and more supply chain delays looms large, and it seems the only certainty in this situation is uncertainty.

The current administration’s handling of this situation will undoubtedly have long-term implications for our nation’s energy security and economic stability. It’s a stark reminder that foreign policy has a direct impact on our everyday lives, and we must remain vigilant in our quest for stability and prosperity.

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