- Wednesday, October 16, 2024
Oil prices remained relatively stable on Monday as traders took a cautious approach while assessing the potential economic impact of recent violence in the Red Sea region. A drone attack carried out by Iran-backed militants resulted in the deaths of three U.S. troops in Jordan over the weekend, with numerous others sustaining injuries. The incident has prompted President Joe Biden to pledge a response, and some Republican senators have advocated for a direct military strike against Iranian forces.
Given that Iran is a major oil producer, any action taken against the country would undoubtedly have significant implications for energy prices. However, despite a 6.4% increase in Brent crude last week, prices dipped by 1.1% on Monday, settling at $82.60 per barrel. The Energy Select Sector SPDR ETF has also experienced a decline since the recent attacks carried out by Hamas against Israel on October 7. Additionally, while U.S. gasoline prices have dropped, some analysts predict a potential rise over the next three months.
Currently, traders have been cautious in attributing a substantial risk premium to oil prices; nevertheless, historical events serve as a stark reminder of the impact that escalating violence involving Iran can have on the energy market. In 2019, Iran's Islamic Revolutionary Guard Corps and Houthi militants targeted assets in and around the Persian Gulf, which is a significantly more vital energy corridor than the Red Sea. Approximately 20% of global crude oil passes through the Strait of Hormuz at the entrance to the Gulf, amounting to roughly twice the volume passing through the Red Sea.
During the attacks in 2019, Saudi Arabia's production was severely disrupted, resulting in a 10% spike in oil prices within a single day. Analyst Helima Croft from RBC Capital Markets warns that there is a "very real risk of a return to the 2019 playbook" given the current circumstances. As geopolitical tensions continue to unfold, the global energy market remains on alert, closely monitoring the situation for any potential repercussions.
The Economic Cost of Red Sea Attacks: A Closer Look at the Oil Market
Recent attacks in the Red Sea have sparked concerns about the potential impact on global energy supplies. While the White House has downplayed the direct energy consequences of these attacks, experts warn that the economic cost could be far more significant.
The Strait of Hormuz, known as the oil market's most crucial supply chokepoint, poses a challenge when it comes to rerouting barrels. As tensions rise in the Red Sea, finding an alternative route becomes increasingly difficult.
In 2022, Saudi Arabia agreed to a temporary cease-fire with the Houthis. Although Saudi assets have not been targeted in the recent violence, experts like Croft believe that investors are too quick to dismiss the potential risks in this vital waterway.
Drawing from the 2019 experience, Croft argues that the peak of Iran's disruptive capabilities is yet to come. The attacks witnessed before were merely a preview of what could unfold in the future.
One concerning factor is the suspected presence of Iranian-funded forces in Iraq. These forces, which are not fully under Iran's control, may attempt to inflict further violence on U.S. and coalition forces. This unpredictability could escalate the war.
Unlike Lebanese Hezbollah, known for its measured response to conflicts, Iraqi militias and the Houthis have shown a higher tolerance for direct confrontation with the United States.
A disturbance in global energy supplies can have wider implications. According to a study published by the Federal Reserve in December, a sustained 10% increase in oil prices historically leads to a 0.4 percentage point rise in the inflation rate.
While the situation appears concerning, it is crucial to acknowledge potential pathways towards de-escalation. Cease-fire talks involving the U.S., Egypt, Israel, and other countries have made some progress during recent discussions held in Paris.
Significant progress in these talks, resulting in the release of Israeli hostages, could potentially lead to a reduction in violence. As a result, oil prices are likely to follow suit.
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