Global Courant
In recent weeks, missile and drone attacks on cargo ships crossing the Red Sea have caused the biggest disruption to global trade since the COVID-19 pandemic. However, despite delayed deliveries, oil prices have remained surprisingly stable.
In response to Israel’s war on Gaza, Houthi rebels – the Iran-linked Shiite movement that controls northern Yemen and its western coastline – have launched a wave of attacks on ships in the Red Sea. By targeting ships suspected of having ties to Israel, they are trying to force Tel Aviv to stop the war and allow full humanitarian aid to Gaza. Houthis have carried out at least 26 separate attacks on merchant ships since November 19.
Although no ships have been sunk yet, the United States recently deployed a multinational naval task force to the region. On December 31, US Navy helicopters killed 10 Houthi fighters and sank three of the group’s speedboats.
The next day, Iran sent its Alborz warship to the Red Sea, exacerbating the already volatile situation. The government has not provided information about the ship’s mission.
On Wednesday, the Houthi rebels fired their largest barrage of projectiles yet, forcing a confrontation with US and British naval forces. On Thursday evening, the US and Britain carried out a bombing campaign against several Houthi facilities in Yemen.
While Brent crude briefly topped $80 a barrel after Thursday’s air raids, oil prices have largely trended sideways in recent weeks. Market fundamentals indicate a balanced or slightly surplus market. And until there is a clear threat to global supply, traders appear to have relegated Middle East tensions to background noise.
The Suez Canal
Houthi activity has so far been concentrated in the narrow strait of Bab al-Mandab, which connects the Gulf of Aden to the Red Sea. About fifty ships pass through the strait every day on their way to and from the Suez Canal – a central artery for world trade.
Some of the world’s largest shipping companies have suspended transit in the region, forcing ships to sail around the Cape of Good Hope in South Africa. The longer route has increased freight prices due to higher fuel, crew and insurance costs.
About 24,000 ships crossed the Suez Canal last year, according to Clarksons, a shipbroker. That amounts to one-tenth of world trade, including 10 percent of marine oil and 8 percent of liquefied natural gas.
Ships transiting the Suez Canal have taken on greater strategic significance since the war in Ukraine, as Russian sanctions have made Europe more dependent on Middle Eastern oil, which a third of the world’s Brent crude oil, the international benchmark.
“The region is an important freight channel and represents almost a third of global container capacity. As such, Houthi-related bottlenecks pose a new risk to inflation,” said Rahul Sharan, senior manager at maritime consultancy Drewry.
“We have diverted hundreds of ships from the Suez Canal in recent months. We don’t yet have a view on which industries are hardest hit, but (consumer goods) costs could rise if oil and gas prices rise.”
Despite supplies being diverted through the Suez Canal, tensions in the Red Sea have so far had a muted impact on energy prices. “We have seen a lot of volatility, so geopolitical risks are being taken into account. But not enough to raise prices,” said energy trader Mohammed Yagoub.
“The truth is that headlines have grown tired. There has been a lot of reporting about the tensions in the Red Sea, especially today. But global inventories have remained largely stable in recent weeks,” Yagoub told Al Jazeera.
“You have to remember that the oil can still travel through Africa, but also from ports in western Saudi Arabia, bypassing the need to cross Bab al-Mandeb.” He said the Houthis are also unlikely to attack ships from friendly oil and gas producing countries in the region.
Tensions with Iran
There are other factors at play: recent record production in the US, the lifting of oil sanctions in Venezuela and tepid global demand, Yagoub added.
Looking ahead, however, he warned that “tensions in Iran, especially around Hormuz, could impact prices.”
About 17 million barrels of crude oil, almost a sixth of global supply, are transported daily through the Strait of Hormuz, between the Arabian Gulf and the Gulf of Oman. If Iran were to become actively involved in the conflict, Tehran could threaten to close this crucial channel.
Such a shutdown could see crude oil prices rise 20 percent within a month and higher after that, said Callum Bruce, an analyst at Goldman Sachs.
“It would be a huge, huge shock. But for now, the implied market chance of this happening is less than 1 percent,” he said. Tehran appears reluctant to engage in a military conflict with the US military and its economy remains vulnerable.
Bruce pointed out that “oil traders will continue to pay close attention to activities in the Middle East. Gaza is ground zero. Then you have the Red Sea. Tensions in the region have also increased in recent weeks.”
On January 2, senior Hamas leader Saleh al-Arouri was killed in Beirut by an Israeli drone strike after three months of hostilities on the Lebanon-Israel border. It was the first airstrike on Beirut since 2006.
This past week, Israel killed a Hezbollah commander in southern Lebanon, while Hezbollah, which has Iranian backing, attacked a sensitive Israeli base with rockets. Meanwhile, Iranian-backed groups in Iraq have stepped up attacks on US military bases.
For his part, US President Joe Biden has said he is keen to prevent the war on Gaza from turning into an all-out regional conflagration, although the bombing of Yemen by the Houthis is seen as an escalation. On Sunday, US Secretary of State Anthony Blinken was sent on a diplomatic trip to the Middle East for the fourth time in three months.
“Israel’s war with Hamas appears to have inflamed already existing tensions,” Bruce said. “And while the U.S. Navy’s activities in the Red Sea made headlines, economic factors continue to dictate oil prices.”
Mohammed Yagoub added: “It is true that megatrends are on the minds of traders. But the likelihood of a regional conflict will increase the longer the fighting in Gaza continues. Yemen proves that. So you could say that oil traders are too optimistic at the moment.”
