Last week’s airstrikes in Yemen by the US and UK are prompting concerns about potential impacts on oil prices. Despite media portrayal of unrest, it is prudent to exercise caution before prematurely asserting a significant spike in oil prices. The 4% surge in crude oil futures on Friday falls within the realm of typical market fluctuations. It is crucial to approach this situation pragmatically, recognizing that trading algorithms are recalibrating in response to unfolding events in the Red Sea, a region currently navigating uncharted waters.
Challenging prevailing market complacency is essential. Historical instances, such as the 2019 attack on Saudi oil infrastructure at Abqaiq, entailed a short-lived surge in crude prices. The market now expects tangible, physical supply interruptions, distinct from incidents in the Red Sea. The ongoing loss of supply in the Red Sea is perceived differently by the market. Despite the latest escalation with the US and the UK responding to events, we observed only a modest uptick, as the market does not yet perceive a significant supply loss. Until tangible disruptions are evident, a sustained, meaningful premium in crude geopolitical risk remains unlikely.
Turning to the present, the oil market appears to downplay, perhaps understandably but erroneously, the risk of the Hamas-Israel conflict disrupting oil supply. This is particularly relevant given potential implications for Iran. Another closely monitored factor is Lebanon, where the possibility of an Israeli-Lebanese war looms, presenting a potential shake-up in the oil landscape.
Drawing parallels to the early 1980s, the current oil market situation carries macroeconomic inflationary undertones. While considering the desirability of expensive oil for Western economies, the current expectation of a surge in Brent crude, to between $82 and $83 per barrel in the coming weeks, may be a tad premature.
The early 1980s marked a pivotal era for the global oil market as it shifted from the disruptions of the 1970s energy crisis to a period of stabilization and declining prices. Strategic petroleum reserves emerged as crucial safeguards during supply uncertainties. Drawing parallels to today’s landscape, with military strikes and geopolitical tensions escalating, the lessons from the early 1980s underscore the enduring importance of strategic reserves and the necessity for adaptive global energy strategies to navigate contemporary uncertainties and maintain a secure oil supply.