Is the Middle East war theatre expanding? Already, the region, crucial to the stability of the global energy supply-demand dynamics, was coping with the ongoing Hamas–Israel conflict. Now it seems several other players are getting sucked into the war.

Oil markets have largely been calm to the war. But that calm is now under strain. And if this happens, it will seriously impact the oil markets. March West Texas Intermediate (WTI) crude oil futures have been oscillating within a narrow $8.00 range, displaying resilience in the face of the growing pressure.

But despite this confinement, the market has managed to register a small gain last week. In the short term, traders are keeping a close watch on the array of elements shaping the oil market, the evolving tensions in the Middle East, fluctuations in US production, and shifts in global demand, Oilprice.com noted.

Since November, the Yemen-based Houthis began attacking merchant vessels passing through the Red Sea. This resulted in a military response from the US and a coalition of forces. Meanwhile, Iran also jumped into the fray, initially striking Iraq and Syria with missiles. But that was not the end of the story.

If Israel continues its Gaza attacks and Iran’s crude output gets hit, oil markets would be in for some real surprises

Early last week, Iran opted to make incursions into Pakistan. This resulted in a tit-for-tat response from Pakistan. The Iranian strike and the Pakistani counter-attacks are just the latest sign of rising turmoil in the larger Middle East.

The possibility of sucking up Lebanon into the conflict is also growing. On January 2, senior Hamas leader Saleh al-Arouri was killed in Beirut by an Israeli drone raid. It was the first air raid on Beirut since 2006. And later, Israel assassinated a Hezbollah commander in south Lebanon, while Hezbollah struck a sensitive Israeli base with rockets. Reports are also emerging that Iran-backed groups in Iraq have also stepped up attacks on US military bases.

This is simple chaos. Geo-political risks are going up.

Attacks by the Houthis militia on merchant vessels passing through the Red Sea, as a sign of support to the embattled Palestinians in Gaza, was the first indication that the war was flaring up. Countries in the region and the West look at Houthis, controlling major areas in Yemen, as a proxy of Tehran. The US has now redesignated the Houthis as a terrorist organisation, while some others in the West, including Canada, are considering the same.

As per an Aljazeera report, Houthis have launched at least 26 separate attacks on merchant freighters since November 19. Only about a week earlier, Houthi rebels fired their largest barrage of projectiles yet, on vessels passing through.

Houthi activity has so far been concentrated in the narrow strait of Bab al-Mandab, which connects the Gulf of Aden to the Red Sea. Approximately 50 ships sail through the strait every day, heading to and from the Suez Canal — a central artery for global trade. Major shipping companies MSC, Maersk and Hapag-Lloyd, Shell, as well as British oil giant BP, among others, have begun diverting their ships to alternative routes.

Freight rerouted from the Suez Canal typically travels around the southern tip of Africa, extending the length and the cost of the trip by roughly 30 per cent, Professor Jason Miller of Michigan State University, was quoted as saying by ABC News.

To counter the threat from the Houthis, the United States dispatched a multinational naval task force to the region. On December 19, US Defense Secretary Lloyd Austin announced that Bahrain, Canada, France, Italy, Seychelles, and the United Kingdom would be among the countries joining a 10-nation “multinational security initiative”.

Then, on the last day of 2023, American Navy helicopters attacked the Houthis, killing 10 of their fighters and sinking three of its speedboats. And this is not stopping. Last week, the US and UK struck Houthi militants for a fifth time in a week after the Houthis attacked another commercial boat Wednesday, and President Joe Biden has vowed that the strikes would continue.

In the meantime, Houthi Defense Minister Mohammed Nasser Al-Atefi has reiterated that the group would respond to the attack(s) carried out by the US and UK. Iran, too, is saying that attacks on Houthis will fuel “insecurity and instability” in the region.

Amid high tensions, Iran’s state media reported the seizure of an oil tanker by the Iranian Navy in the Sea of Oman. The oiler was reportedly seized last year by the US government alongside a large cargo of Iranian crude oil. Iran said its seizure of the vessel was a retaliatory act.

In the wake of these developments, how safe would the Strait of Hormuz remain for crude-carrying vessels and for how long continues to be a concern. Some 17pc of globally traded oil passes through the narrow Straits of Hormuz. The theatre is heating up.

For his part, US President Joe Biden has said he is keen to prevent the war on Gaza from spiralling into an all-out regional conflagration, yet, the bombing of Yemen by the US and UK has been viewed by the Houthis as an escalation.

While these events have yet to disrupt global oil supplies significantly, they have led to increased shipping costs. Despite reports that after the US attacks on Houthis, some of the vessel operators have resumed using the Bab al-Mandab Strait, the situation remains volatile.

Tankers carrying nearly 9 million barrels of oil from Saudi Arabia and Iraq are set to delay their deliveries to customers, as they have diverted away from the Red Sea/Suez Canal route in recent days, and are headed via the longer route through Africa, Bloomberg vessel-tracking data showed on Friday.

In the event of a direct conflict between Israel and Hezbollah, oil prices could go up, resulting in a price shock. Helima Croft, a former CIA analyst, told CNN, that there is a “very real risk” to energy facilities in the region if Iran decides to enter the conflict directly and suggested oil prices have room to rise sharply if the situation escalates further.

Oil markets are on the edge. Despite weak demand and ample spare capacity among the Organisation of Petroleum-Exporting countries and oil producers, if Israel continues its Gaza attacks and Iran’s crude output gets hit, oil markets would be in for some real surprises, one could underline at this juncture.

Published in Dawn, The Business and Finance Weekly, January 22nd, 2024

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