Oil jumped as the US and allies launched airstrikes against Houthi rebels in Yemen, stepping up retaliation for attacks on ships in the Red Sea that have imperiled flows of fuel and goods through the vital waterway. President Joe Biden said strikes had been successfully conducted against a number of targets used by the Iranian-backed group, with US officials saying radar sites and missile launchers were hit. Global benchmark Brent crude rose as much 2.5% to above $79 a barrel as investors attempted to gauge the likelihood of whether the strikes will spark a broader conflict in the Middle East. The Houthis had launched their largest assault to date on shipping in the Red Sea earlier this week, despite the presence of a US-led naval force. That prompted warnings of retaliation from Washington. Iran also seized a tanker off the coast of Oman on Thursday, further inflaming the situation. The US-led strikes mark an escalation of tensions in the Middle East that have been rising since the Hamas attack on Israel in early October. The Houthis have been firing missiles at ships on an almost-daily basis over the past two months, and have vowed not to let up until Israel ends its assault on Gaza. The major danger for prices is if Iran is drawn directly into the conflict, which could threaten output and flows in a region that produces a third of the world’s crude. That’s reintroducing a war-risk premium to the market, which had been weakening due to rising non OPEC+ supply and slowing demand growth. “A ratcheting up in the conflict suggests a greater potential for disruptions, and the need for vessels to divert,” aiding prices, said Warren Patterson, head of commodities strategy at ING Groep NV. “However, the bigger risk is if this spreads and we start to see threats to flows coming out of the Persian Gulf. While we believe the risk of this is low, the impact would be significant.”President Biden left open the possibility of additional moves against the Houthis. “I will not hesitate to direct further measures to protect our people and the free flow of international commerce as necessary,” he said. The airstrikes are a gamble for the US and the UK, which have repeatedly said a priority amid the Israel-Hamas fighting is to keep it from spreading. There are concerns from Saudi Arabia and nations that such action will inflame tensions, and after the US-led action, Riyadh issued a call for restraint. The Houthi assaults in the Red Sea have prompted many commercial shippers to direct vessels around the southern tip of Africa, rather than risk a passage through the waterway that links to the Suez Canal. That’s increased costs. Ahead of the strikes, Citigroup Inc. estimated that geopolitical risks in the Middle East had added $2 to $3 barrel to Brent, and said the premium may increase substantially if supply disruptions expanded. Standard Chartered Plc, meanwhile, has said oil was underpriced by at least $10.
Brent’s prompt spread — the difference between its two nearest contracts and a key metric — signaled tighter near-term conditions. The gap was 37 cents a barrel in backwardation, up from 3 cents on the first trading day of the year. “The fluctuations in prices will absolutely remain in place as the situation develops,” said Vandana Hari, founder of consultancy Vanda Insights. “It’s an uneven tug-of-war between a bearish outlook on fundamentals and a supportive Mideast risk premium. As of now, both can be expected to remain in play.”