The recent attacks on ships in the Red Sea are causing significant geopolitical concerns and economic implications as the ensuing chaos disrupts shipping flows, contributing to inflationary pressures. Surprisingly, this turmoil hasn’t translated directly into soaring oil prices, leaving many puzzled. However, experts argue that the Red Sea attacks by Houthi militants are the primary factor preventing crude oil from trading even lower.
Analysts contend that the true impact of these disruptions is challenging to discern amid the various forces exerting downward pressure on oil prices. If not for the heightened tensions in the Middle East, crude oil prices would likely be in the range of $70 to $75 per barrel. This assessment was made when Western Texas Intermediate crude was at $77 a barrel; since then, prices have declined to $72, partially influenced by an erroneous Al-Jazeera headline regarding a ceasefire in Gaza.
Rebecca Babin, an oil analyst from CIBC Wealth Management, emphasized that while it may not appear that oil prices are significantly rising, the geopolitical tension is supporting the market against what seems to be a slight fundamental weakness. Factors contributing to this weakness include slowing demand in China post-COVID, an oversupply of oil in the market due to non-OPEC nations increasing crude production, and OPEC’s struggles to boost prices by cutting output.
The uncertainty surrounding OPEC’s ability to unwind production cuts and maintain member compliance, especially after Angola’s departure from the group in December, is an additional factor suppressing oil prices. Babin explained, “Instead of saying ‘Why isn’t [the price] higher?’ it’s really saying, ‘Well, if we didn’t have this, we’d probably be a lot lower.'”
Babin’s updated note on Thursday suggested that a confirmed ceasefire could prompt a temporary drop in oil prices to $70 a barrel for WTI crude. The market, according to her, had not factored in a significant reduction in supply due to Middle East escalation but had accounted for elevated shipping costs associated with the Red Sea turmoil.
It’s crucial to note that the shipping disruptions in the Red Sea have not resulted in barrels of oil being removed from the market or caused any supply shortages. Hunter Kornfeind from Rapidan Energy explained that while transit times are longer, causing a rally in prices, there hasn’t been a substantial impact on daily exports. Without the geopolitical chaos, Brent crude, the international benchmark, would likely be trading at a lower range of $70 to $75 per barrel compared to the $82 per barrel recorded on Wednesday.
In the absence of a ceasefire, Babin suggested that, considering other fundamental pressures such as China’s economic slowdown and ongoing OPEC concerns, Brent crude prices could potentially rise to $90 a barrel.