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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.”

Tensions in the Middle Eastern shipping lanes continued to run high on Thursday amid reports of a hijacked oil tanker in the Gulf of Oman, which was boarded by masked individuals and forced to alter course toward Iran.  The UK Marine Trade Operations (UKMTO) said on Thursday that it had received a report of a vessel being boarded by 4-5 armed unauthorized persons in an area east of Sohar, Oman. “Unauthorised boarders are reported to be wearing military style black uniforms with black masks,” the UKMTO said. The ship “has altered course towards Iranian territorial waters and communications with the vessel have been lost,” the UK authority said.  According to TankerTrackers.com, the oil tanker “which the Iranians have boarded today in the Gulf of Oman is the ST NIKOLAS”, which is carrying Iraqi oil. Formerly known as the SUEZ RAJAN, the tanker was previously seized by the U.S. government after being found to transport a million barrels of Iranian oil in connection to a U.S. company, TankerTrackers.com noted.  At the time of the incident, the vessel was traveling to the Turkish port of Aliaga after loading crude from the Iraqi Basrah Oil Terminal.  A spokesperson for Empire Navigation, the company managing the St. Nikolas, told CNBC that it lost contact with the vessel on Thursday, but could not confirm an unauthorized boarding. It was not immediately clear who boarded the oil tanker, but the latest incident shows that tensions in the waters in the Middle East are escalating.  Early on Thursday, oil prices rose by nearly 2% amid intensified attacks on commercial shipping in the Red Sea this week.  On Wednesday, Israel stepped up its attacks on Gaza and the Yemeni Houthis carried out what UK Defence Secretary Grant Shapps called the largest attack in the area yet.  Per media reports citing U.S. Central Command, the U.S. and UK forces in the Red Sea shot down 21 drones and missiles on Tuesday alone. NN: the shit is hitting the fan!

A fresh escalation of violence in the Middle East pushed oil prices higher early on Thursday, even after Wednesday’s session ended with losses for both WTI and Brent.  Those losses were driven by an unexpected build in U.S. crude oil inventories and another round of substantial builds in fuel inventories. However, also on Wednesday Israel stepped up its attacks on Gaza and the Yemeni Houthis carried out what UK Defence Secretary Grant Shapps called the largest attack in the area yet. Per media reports citing U.S. Central Command, the U.S. and UK forces in the Red Sea shot down 21 drones and missiles on Tuesday. The Houthis’ military spokesman, Yahya Saree, said they had attacked a U.S. military ship because it was “providing support” to Israel. “Oil prices seem to be in a state of indecision this week, as market participants attempt to digest a confluence of factors,” IG analyst Yeap Jun Rong told Reuters. “It’s an uneven tug-of-war between a bearish global oil demand-supply outlook and a supportive, albeit fleeting, risk premium from the Red Sea attacks and tensions,” Vandana Hari from Vanda Insights told Bloomberg. “Sentiment appears more predisposed to panicky selling than protective buying.” The news outlet reported that the Houthi attacks had reduced the number of tankers passing through the Bab el-Mandeb strait off the coast of Yemen by a third. This must be a very recent development, however, since Reuters reported earlier this week that in December there was no palpable change in tanker movements in the area. “We haven’t really seen the interruption to tanker traffic that everyone was expecting,” Lloyd’s List shipping analyst Michelle Wiese Bockmann told Reuters. The Houthis have not targeted tankers so far. Yet the danger of this changing prompted some oil traders such as BP and Equinor to reroute their vessels away from the Red Sea.

Crude oil prices moved lower today after the U.S. Energy Information Administration estimated a relatively moderate inventory build in crude all and also reported sizeable increases in fuels for the first week of 2024. In crude, the EIA reported an increase of 1.3 million barrels At 432.4 million barrels, inventories are about 2% below the five-year average for this time of the year. The weekly change compared with a decline of 5.5 million barrels for the last week of 2023. A day before the EIA report was released, the American Petroleum Institute estimated a larger than expected decline in inventories, prompting a gain for oil prices. The effect was reinforced by the EIA’s latest Short-Term Energy Outlook that projected oil demand will exceed supply by 120,000 bpd this year. In fuels, meanwhile, the authority reported inventory builds for the first week of January. In gasoline, the EIA estimated an inventory increase of 8 million barrels, which compared with a massive build of 10.9 million barrels for the final week of 2023. Gasoline production averaged 9.7 million barrels in the first week of January, which compared with 8.8 million bpd for the previous week. In middle distillates, the EIA estimated an inventory build of 6.5 million barrels for the first week of the new year. This compared with an increase of 10.1 million barrels for the final week of 2023.  Middle distillate production averaged 5.2 million barrels daily, which compared with 5.1 million barrels daily for the previous week. Oil prices, meanwhile, remain stuck between oversupply perceptions and Middle Eastern supply disruption risk. Saudi Arabia’s announcement of deeper than expected price cuts for February cargos led to a surge in bearish sentiment but short bets were limited by caution with regard to the situation in the Red Sea. There, Houthi attacks on ships continue despite the ramped-up military presence of U.S. and UK forces. In the latest update from the region U.S. Central Command said it and UK forces had shot down more than 20 drones and missiles released by the Houthis.

Attacks by Iran-backed militants in the Red Sea have effectively closed one of the world’s main trade routes to most container ships — vessels that carry everything from car parts to Crocs from one corner of the globe to another.

A prolonged closure of the waterway, which connects with the Suez Canal, could snarl global supply chains and drive up the prices of manufactured goods at a crucial moment in the battle to defeat inflation. The Suez Canal accounts for 10-15% of world trade, which includes oil exports, and for 30% of global container shipping volumes.

The Houthi militants, based in Yemen, say they are taking revenge for Israel’s war against Hamas in Gaza. The US military and its allies have beefed up maritime security but the attacks continue — 21 Houthi missiles and drones were shot down late Tuesday.

As the crisis persists, the stakes for the global economy are rising. Retailers are already warning of delays, and the cost of shipping goods is increasing.

In a biannual report released Tuesday, the World Bank warned that the disruption to key shipping routes was “eroding slack in supply networks and increasing the likelihood of inflationary bottlenecks.”

Six of the 10 biggest container shipping companies — namely Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM and ONE — are largely or completely avoiding the Red Sea because of the threat from the Houthi militants.

The danger to crew, cargo and vessels has forced carriers to reroute ships around the Cape of Good Hope in South Africa, resulting in delays of up to three weeks.

This has already significantly increased shipping costs, which could ultimately show up in consumer prices. “The longer the disruptions persist, the stronger the stagflationary effects for the global economy,” chief economist at Allianz, Mohamed A. El Erian, wrote last week on X, referring to a toxic combination of low or zero economic growth and high inflation.

If the Israel-Hamas war escalates into a wider regional conflict or the Houthis decide to redirect their attacks toward oil tankers and bulk carriers — which transport crucial raw materials such as iron ore, grain and timber — the consequences for the global economy would be altogether more severe.

“In a setting of escalating conflicts, energy supplies could also be substantially disrupted, leading to a spike in energy prices,” the World Bank report added. “This would have significant spillovers to other commodity prices.”

The threat to energy prices is the biggest risk, according to Capital Economics.

“While current shipping disruptions themselves are unlikely to disrupt the global trend of falling inflation, a marked escalation of the underlying military conflict could boost energy prices, which would be passed onto consumers,” Simon MacAdam and Lily Millard, economists at the consultancy, wrote in a note last week.

Oxford Economics also expects that inflation will continue easing but still sees an upside risk to prices. If container transport costs stay around their current levels — almost twice the level of early December — this might boost world inflation by about 0.6 percentage points, Ben May, director of global macroeconomic research at the firm, wrote in a note on January 4.

Delivery delays

Some European automakers have rerouted their shipments around the Cape of Good Hope. “This has entailed higher costs and delays of around two weeks,” said a spokesperson for the European Automobile Manufacturers’ Association.

And retailers such as Swedish furniture company Ikea have warned of shipment delays and possible shortages of certain products. Similarly, British clothing retailer Next said last week: “Difficulties with access to the Suez Canal, if they continue, are likely to cause some delays to stock deliveries in the early part of the year.”

Crocs (CROX) has likewise said items destined for Europe are taking two weeks longer than usual to arrive. The shoemaker does not expect a “material impact” on its business for now but told CNN it would “continue to monitor the situation closely.”

It’s not alone. Businesses around the world are on tenterhooks, hoping the disruption will end soon but beginning to dust off contingency plans last deployed during the pandemic if it doesn’t.

Abercrombie & Fitch (ANF) plans to use air freight wherever possible to avoid delays, according to an email to suppliers seen by Bloomberg. “We shift transportation modes and/or shipping lanes when warranted to maintain flow of goods,” a company spokesperson told CNN.

Ikea has warned of shipment delays and potential shortages of certain products due to disruption in the Red Sea.

Nathan Howard/Bloomberg/Getty Images

The situation could worsen in the coming weeks as shippers rush to get orders out of China before factories close for the country’s Lunar New Year holiday.

“The next five weeks leading to Chinese New Year on the 10th of February are going to be very difficult for shippers and for shipping,” Philip Damas, head of Drewry Supply Chain Advisors, said in recorded comments posted online Monday.

He noted, however, that excess shipping capacity more broadly meant spot rates — the price of one-off freight shipments as opposed to prices agreed in advance — “will decline again after Chinese New Year.”

‘Total crunch’

In addition to a surge in spot freight rates from the Red Sea attacks, carriers are tacking on emergency surcharges.

“All-in prices” of $5,000-$8,000 per container for major trade routes originating in Asia are 2.5 to 4 times the “normal levels” for this time of year, according to estimates by Judah Levine, head of research at logistics firm Freightos.

However, that is still 45%-75% below their “pandemic peak” in late 2021, Levine noted. Back then, soaring demand for goods from housebound consumers collided with supply bottlenecks, ranging from container shortages to port congestion.

The Port of Los Angeles in the United States on December 4, 2023.

Eric Thayer/Bloomberg/Getty Images

The Suez Canal debacle adds to existing problems in shipping, with traffic through the vital Panama Canal already restricted because of a severe drought.

“For companies trying to move goods across the world you have a total crunch right now — you can’t rely on the Panama Canal (and) you can’t rely on the Suez Canal,” said Carolina Klint, chief commercial officer for Europe at Marsh McLennan, a professional services firm.

Some ocean carriers that ordinarily transit through the Panama Canal had rerouted to the Suez Canal before the attacks in the Red Sea escalated, according to logistics company C.H. Robinson.

Matthew Burgess, vice-president of global ocean services at the firm, said global shipping capacity would be constrained for a while yet. “There will be a shortage of Asia-to-Europe space for, at a minimum, the next eight weeks due to the additional time needed to use the Cape of Good Hope routing,” he told CNN.

Houthi attacks close vital Red Sea route for Maersk’s container ships

“As we’ve seen with previous global shipping disruptions, shortages of empty equipment will likely be a fast follow, which further elevates delays because companies may need to wait two-three additional weeks for an empty container.”

At least for now, major ports in Europe and the United States — including the Port of Rotterdam, the Port of Los Angeles and the Port of New York and New Jersey — have seen limited impact from the Red Sea crisis. But they are on high alert for potential fallout.

“It is yet another disruption in the supply chain,” Gene Seroka, executive director of the Port of Los Angeles, told CNN. “This is not going away in three or four weeks.”

And even if the attacks stopped today, allowing most vessels to transit the Red Sea, the earlier impacts could still reverberate for some time to come, according to Burgess of C.H. Robinson. “The disruption and delays already in play will take a significant amount of time to resolve.”