Middle East Tensions Trigger Oil Market Chaos: How High Will Prices Go?



by FARUK IMAMOVIC

Middle East Tensions Trigger Oil Market Chaos: How High Will Prices Go?
© Getty Images/Brandon Bell

The recent US-led airstrikes on Houthi targets in Yemen have sent shockwaves through the energy markets, highlighting the fragile balance between geopolitical tensions and global oil supply. This escalation has prompted a swift reaction in oil prices, reflecting the interconnected nature of global politics and energy economics.

Sudden Surge in Oil Prices

On Friday, oil markets experienced a significant surge, with US crude climbing as much as 4.5% to $75.25 a barrel, and Brent crude briefly surpassing the $80 mark. This increase came in the wake of US-led strikes on Houthi targets in Yemen, a response to the Houthis' repeated attacks on commercial shipping in the Red Sea.

The strikes, targeting the Iran-backed Houthis, have raised concerns about a potential regional conflict that could severely disrupt oil supplies from the Middle East.

Robert Yawger, vice president of energy futures at Mizuho Securities, expressed concerns about the escalating situation: “The chance of dragging multiple oil-producing countries into the conflict is definitely higher today than it was yesterday”.

This sentiment captures the growing unease in the market about the stability of oil supply in the region.

Geopolitics and Market Volatility

The market's reaction to the airstrikes is a stark reminder of the volatility that geopolitical events can inflict on global commodities.

While oil prices saw a substantial increase, they later moderated, reflecting the market's ongoing struggle to balance fundamental supply and demand dynamics against geopolitical risks. In 2019, a significant drone attack on Saudi oil facilities, which temporarily knocked off about 5% of the world's oil supply, is a reminder of the vulnerabilities of oil infrastructure in the region.

The potential for retaliatory strikes against such facilities remains a key concern for market analysts and investors. Despite these tensions, oil prices are still lower than before the October 7 attacks by Hamas against Israel, indicating underlying concerns about oversupply in the market.

This juxtaposition of supply dynamics and geopolitical risks highlights the complexity of predicting oil market movements.

US Strategy to Mitigate Escalation

The White House is acutely aware of the potential for further escalation.

John Kirby, the coordinator for strategic communications at the White House National Security Council, said: “Everything we’re doing, everything we’re trying to do, is to prevent any further escalation”.

This statement underscores the US government's cautious approach in navigating these turbulent waters.

Matt Smith, lead oil analyst at Kpler, described the current market dynamics as a battle between fundamentals and geopolitics.

The incidents in the Red Sea and near the Strait of Hormuz, two critical maritime chokepoints, further compound this tension. Helima Croft, head of global commodity strategy at RBC Capital Markets and a former CIA analyst, warned of a "very real risk" to energy facilities in the region.

She suggests that oil prices could rise sharply if the situation escalates, indicating that the current prices may not fully account for the potential risks.