Oil rises 2% as some tankers avoid Red Sea after strikes

Published On : 01/12/2024

By Arathy Somasekhar

HOUSTON (Reuters) -Oil climbed more than 2% on Friday, as some oil tankers diverted course from the Red Sea following overnight air and sea strikes by the United States and Britain on Houthi targets in Yemen after attacks on shipping by the Iran-backed group.

Brent crude futures were up $1.61, or 2.1%, at $79.02 a barrel at 10:45 a.m. ET (15:45 GMT), while U.S. West Texas Intermediate crude futures climbed $1.51, or 2%, to $73.53.

The Brent benchmark was on course for a second straight weekly rise, while WTI was set to close lower for the week.

“While crude supply and demand had been approaching equilibrium with prices near $70 per barrel, the escalation of tensions in the Middle East is now taking precedence and very well could place a $5-$7 a barrel premium to crude futures in the near term,” said Dennis Kissler, senior vice president of trading at BOK Financial.

Tanker companies Stena Bulk, Hafnia and Torm all said they had decided to halt all ships heading towards the Red Sea.

The U.S. and UK strikes come in retaliation for Houthi attacks since October on commercial vessels in the Red Sea, concentrated on the Bab al-Mandab Strait to the southwest of the Arabian Peninsula, in a show of support for Palestinian militant group Hamas in its fight against Israel.

The escalation has fuelled market concerns about the Israel-Hamas war widening into a broader conflict in the Middle East affecting oil supplies from the region.

That includes the important Strait of Hormuz, on the opposite side of the Arabian Peninsula, between Oman and Iran. Iran seized a tanker on Thursday carrying Iraqi crude south of the strait destined for Turkey.

“If a large part of Strait of Hormuz flows were to be halted, it would present up to three times the impact of the 1970s oil price shocks and over double the impact of the Ukraine war on gas markets, atop already fragile supply chains and stock levels,” said Saul Kavonic, an energy analyst at MST Marquee.

Diversion of tankers around South Africa will also push up freight rates as ships take longer routes, adding to the cost of transportation and oil.

U.S. President Joe Biden said the “targeted strikes” in Yemen were a clear message that the United States and its partners will not tolerate attacks on its personnel or “allow hostile actors to imperil freedom of navigation”.

A Houthi spokesperson said the group would continue to target shipping heading towards Israel.

Saudi Arabia, a top oil exporter and regional power, called for restraint and “avoiding escalation” and said it was monitoring the situation with great concern.

Attacks by the Houthis in the Red Sea have disrupted international commerce on a route between Europe and Asia which accounts for about 15% of the world’s shipping traffic.

Also supporting the oil price, China, the world’s biggest energy consumer, bought record levels of crude oil over 2023, as demand recovered form a pandemic-induced slump despite economic headwinds.

The premium of the first-month Brent contract to the six-month contract rose to as much as $2.09 a barrel on Friday, the highest since early November. This structure, called backwardation, indicates a perception of tighter supply for prompt delivery.

(Reporting by Arathy Somasekhar in Houston, Paul Carsten in London, Sudarshan Varadhan in Singapore; Editing by Nick Macfie)

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