Following U.S. and British airstrikes against Houthi rebels in Yemen in response to attacks on shipping operations in the Red Sea, crude oil prices became volatile on Friday. The price of U.S. crude spiked 4.3% to $76 per barrel in early trading, while bent crude rose 4% to more than $80.
On Thursday, Houthi rebels fired an anti-ship missile into the major international shipping lane in the Gulf of Aden south of Yemen, prompting the Western allies’ military response. U.S. officials said it was the 27th Houthi attack since mid-November.
Iran said Thursday it had seized an oil tanker carrying Iraqi crude oil on its way to Turkey. It was the first attack on an oil tanker as a result of the growing Middle East conflict.
Until this week, crude oil prices had been holding steady in recent months as a result of weakened demand, “but on the flip side of that, we have all these geopolitical concerns that are acting as a counterweight to keep oil prices supported at a time when the backdrop is otherwise looking a little bit weak.”
Smith said gas prices have so far remained steady in the U.S. at just over $3 per gallon nationally, but, oil prices being a key driver of gasoline prices, “If we see a massive escalation in the Middle East in terms of supply disruptions, that will filter back to the U.S.”
Houthis began targeting commercial ships in the Red Sea late last year following Israel’s war against Hamas in retaliation for its October 7 attack. The majority of the Houthi shipping attacks have been on container ships, not oil tankers, because the rebels “get a bigger bank for their buck,” Smith said. “There are so many different containers owned by different companies whereas with oil tankers, they run the risk of hitting one of their neighbors’ oil tankers and that causes the conflict to escalate significantly.”
About 12% of international trade travels through the Red Sea — a maritime route between Egypt, Saudi Arabia and Yemen in the Middle East that links Europe and Asia. Increasingly container ships are diverting to other routes.
The number of daily oil tankers traveling through the Red Sea has dropped from 239 in November to 230 in December and 213 in January, Smith said, as European companies opt to source oil from the U.S. and areas other than the Middle East.
One day before Thursday’s U.S. and UK airstrikes in Yemen, the Energy Information Administration projected flat crude oil prices in 2024 and 2025 as supply and demand balance out. It expects the price of crude to increase slightly in the first quarter of the year due to OPEC+ production cuts announced last year that have reduced output. It anticipates prices will begin falling in April as global production exceeds consumption.
U.S. oil production is expected to increase by 0.4 million barrels per day in 2024 and 2025.
Still, “the potential for prices to exceed our current forecast is largely related to unplanned production disruptions, a risk highlighted by the recently escalating tensions in the Red Sea,” the EIA noted earlier this week.
