Houthi Attacks on Shipping Vessels Heighten Risks
Oil prices have climbed over the past week due to supply disruptions and heightened geopolitical tensions in the Red Sea region after Houthi rebel attacks on shipping vessels near the port of Hodeidah. Several oil tankers were targeted, forcing ships to reroute and avoid the area.
While the disruptions have been limited so far, the incidents have sparked concerns over potential threats to global oil supplies flowing through the important Bab el-Mandeb strait between Yemen and Djibouti. Over 4 million barrels per day of crude and refined products flow through the Red Sea to Europe, Asia and North America.
The risks come even as oil prices have retreated over the past month due to concerns over slowing global demand. However, the attacks have put an renewed focus on global supplies.
Oil Gains More Than 3% Over Past Week
Oil prices have posted gains of more than 3% over the past week. Brent crude, the global benchmark, rose to over $80 per barrel following the latest incident on December 25th involving a tanker affiliated with an oil products storage firm.
The gains come despite the Energy Information Administration reporting that U.S. output hit a fresh record last week to 12.2 million barrels per day (bpd).
Impact on Product Prices
The rise in crude prices sparked by the tensions in the Red Sea could lead to higher gasoline prices at the pump for U.S. consumers. After retreating for much of December, retail fuel prices may be pressured higher if the risks persist.
Wholesale gasoline futures have gained nearly 5% over the last week, suggesting retail prices could rise in January from the current national average of $3.288 per gallon. Any sizable moves would reverse the steady decline in prices since mid-November.
|US National Average Gasoline Price
Data Source: AAA
Analysts Don’t Expect Major Lasting Impact
However, several analysts say the Red Sea incidents are unlikely to severely impact global markets unless disruptions intensify or oil flows are halted for a prolonged period.
“The oil market isn’t freaking out about attacks by Houthis,” said Senior Oil Analyst Darryl Vikshteyn of StoneX Financial.
“There have been sporadic incidents in region for years and production has largely been unaffected. Prices are reacting more to headline risks right now rather than any material shift in global balances,” he added.
Unless supplies through the critical Bab el-Mandeb strait are cut off, Vikshteyn believes any gains will be limited.
U.S. oil production reaching new highs has also eased some of the supply constraints seen earlier this year. More supply from OPEC+ may also temper gains if geopolitical risks accelerate.
Impact on Stocks
Energy stocks have been among the standout performers as oil prices rebounded. Over the last 5 trading days, top gainers included refiners Valero, Marathon Petroleum and Phillips 66.
The S&P 500 energy sector has jumped 5.6% over the past week, making it the best performing segment.
|5-Day Stock Performance
Data Source: FactSet
If tensions escalate more meaningfully, production and transportation stocks could also benefit. Tanker owner Teekay Corp, pipeline operators Enterprise Products Partners and oil services firms Halliburton and Schlumberger may be stocks to watch closely according to Oppenheimer analyst Noah Barrett.
Market Eyeing Israel-Hamas Ceasefire
Apart from the Red Sea incidents, the market is also keeping an eye on ceasefire talks between Israel and Palestinian militant group Hamas. A detente between the rivals could further ease tensions and downside price risks if progress is made.
Several brokers suggest the rising output from non-OPEC producers could act as buffer even if supply disruptions occur. Goldman Sachs sees potential for prices to fall below $70 per barrel in 2023 if demand slows further.
Outlook Hinges on Multiple Factors
Oil’s near-term direction depends on multiple uncertain factors, including the duration of shipping disruptions in the Red Sea, progress on Israel-Hamas negotiations, demand trends related to China’s reopening, and OPEC’s supply policy.
If tensions meaningfully disrupt output or shipments, prices could spike much higher. Brent crude rose above $139 in March this year following Russia’s invasion of Ukraine.
However, absent a major escalation that impacts production, any gains may be capped by concerns over slowing demand and efforts by consuming countries to tap stockpiles. G7 nations negotiated the price cap on Russian oil specifically to avoid supply shortfalls.
Overall, most analysts expect prices will remain rangebound between $70 to $90 per barrel in the first half of 2024 if supplies remain plentiful. But policy shifts by producers, unforeseen disruptions or faster demand growth all pose upside risks that could spur much larger price swings.
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