Oil prices jumped past $80 per barrel Friday for the first time this year as violence in the Red Sea prompted more vessels to change course and sparked new fears of broader disruption.
Prices for international benchmark Brent crude and U.S.-based West Texas Intermediate each jumped by more than 4%, rising as high as $80.57 per barrel and $75.07 per barrel, respectively.
The price hikes come after the United States and Britain conducted a string of targeted airstrikes against Houthi sites in Yemen Thursday as retaliation for weeks of violence staged by rebels on ships attempting to pass through the Suez Canal, a key international waypoint for oil and liquefied natural gas shipments traveling from the Persian Gulf to Europe and North America.
“These targeted strikes are a clear message that the United States and our partners will not tolerate attacks on our personnel or allow hostile actors to imperil freedom of navigation,” President Joe Biden said in a statement.
“I will not hesitate to direct further measures to protect our people and the free flow of international commerce as necessary,” he added.
The U.S. earlier this year also announced the creation of “Prosperity Guardian,” a multinational effort aimed at ensuring freedom of navigation in the Red Sea.
The attacks and retaliation come after the Iranian-backed Houthi rebels have targeted commercial ships traveling through the Bab al-Mandab Strait to the Suez for the last four weeks, threatening to upend or delay the transport of key goods, including energy products.
More than 12% of total seaborne oil shipments and 8% of LNG shipments passed through the Suez in the first half of 2023, according to the Energy Information Administration. Europe also depends heavily on the Suez for energy supplies, meaning it could feel the brunt of any delays.
Already, the attacks have forced many commodities shippers in the Suez to halt shipments temporarily or reroute them around Africa’s Cape of Good Hope instead.
Danish shipping giant Maersk, BP, Germany’s Hapag Lloyd, and Norway’s Equinor all announced plans to reroute via Africa in recent weeks, citing the deteriorating security situation.
And on Friday, the Combined Maritime Forces group led by the U.S. in Bahrain warned all ships to “stay well away” from the Bab al-Mandab Strait, according to a note from the trade group Intertanko.
Impact so far
The Red Sea violence has raised new concerns about a broader conflict that analysts fear could cause widespread disruption to shipping firms and commodities markets.
The number of vessels entering the Red Sea has decreased by roughly 50%, year-on-year, in the first week of January.
But the alternative for shipping companies — traveling around the Cape of Good Hope — adds time and significantly higher costs.
On average, shipments around Africa take 10-20 days longer than using the Suez, and costs are nearly three times higher, according to data shared with the Washington Examiner on Friday by the shipping logistics firm Container XChange.
The firm said it expects shipping costs to increase up to 60%, coupled with a 20% increase in insurance rates, in the weeks ahead as the crisis continues to unfold.
Risks of escalation
The recent attacks have also raised the specter of a broader, more protracted conflict in the Red Sea.
This could be particularly dangerous if tensions escalate beyond the Suez and into the Strait of Hormuz, the world’s most important oil chokepoint that moves more than 20 million barrels of oil per day (or 20% of global consumption), from the Persian Gulf.
Meanwhile, Iran announced Thursday that it had seized an Iraqi crude oil tanker near the Strait of Hormuz that was destined for Turkey, though it is unclear whether the incident is related.
Any provocation in this area would be a major escalation, locking in valuable exports from Saudi Arabia and other Middle East producers.
Even setting aside Iran’s seizure, the prospect of higher prices and more supply chain delays from the Red Sea disruption is almost inevitable, at least in the near-term.
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ING said it expects continued shipping and price impacts through the second half of 2024 as a result of the sustained violence. “Risks are unlikely to disappear anytime soon amid intensified incidents, the ongoing war in Gaza and associated geopolitical tensions in the Middle East,” analysts said in a research note Friday.
And while it believes the risk of significant disruption to oil flows from the Persian Gulf is “low” for now, it said, “it is certainly worth keeping an eye on, given the potential impact it could have on oil supply and prices.”