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Oil futures experienced a significant drop on Friday, declining over 3 per cent, yet they are still poised for impressive weekly increases. This fluctuation comes amid growing concerns regarding disrupted energy flows in the Red Sea and escalating tensions in the ongoing conflict between the U.S. and Israel against Iran. Brent crude futures fell by nearly US$4, or 3.96 per cent, settling at US$96.70 a barrel. This drop follows a brief surge above US$100—marking the first time since May—after the Iran-aligned Houthi forces claimed responsibility for attacks on two Saudi oil tankers in the Red Sea. Despite the recent downturn, Brent remains on track for a weekly gain of approximately 9.7 per cent. Meanwhile, West Texas Intermediate (WTI) crude saw a decline of US$3.15, or 3.42 per cent, bringing prices to US$89.04 a barrel, but is expected to register nearly an 8 per cent increase over the week.
Geopolitical Factors at Play
The recent turmoil in the Red Sea highlights the vulnerability of key oil supply routes amid ongoing warfare. John Evans, an analyst at PVM Oil Associates, remarked, “Major hubs of oil production or supply routes are surrounded by war… The short-term outlook is bullish.” This precarious situation has prompted U.S. President Donald Trump to vow “major military punishment” against Iran and its Houthi allies following the attacks.
Iran has been pushing the Houthis to close the strategically vital Bab el-Mandeb strait as a response to continued U.S. assaults on Iranian infrastructure. The Bab el-Mandeb represents the second most crucial passage for energy shipments worldwide, following the Strait of Hormuz. In a move to circumvent Iran’s influence, Saudi Arabia has redirected its oil through pipelines, as the Houthis announced a naval blockade on the Kingdom.
Shipping Movements Remain Steady
Despite the heightened tension, preliminary ship-tracking data from Kpler indicates that daily vessel transits through the Strait of Hormuz have remained consistent, with three ships passing through over the last three days. Notably, two additional vessels, including the empty very large crude carrier Noble, navigated into the Gulf via this strait on Thursday. At the Bab el-Mandeb, the number of commodity vessel transits rose to 32 on July 23, up from 26 the previous day, with two crossings recorded for July 24 thus far. Giovanni Staunovo, a UBS analyst, commented, “In the right seas, ships are still moving… so it’s not a complete blockade as some might have feared.”
Future Supply Concerns
Analysts at JPMorgan have stated that disruptions to oil supply could result in an increase of US$7 to US$8 per barrel for Brent crude. If these supply issues persist for three months, average monthly prices could potentially reach around US$114 a barrel. This prediction underscores the delicate balance of oil markets in the face of geopolitical strife.
In further developments, Russia reported on Friday that its military had targeted three Ukrainian ports overnight, focusing on infrastructure critical to the Ukrainian armed forces, including loading facilities and fuel reserves. Concurrently, Kazakhstan’s energy ministry announced that local oil companies had temporarily curtailed production following suspected drone attacks that forced the closure of the country’s main Black Sea export terminal.
Why it Matters
The fluctuations in oil prices and the ongoing geopolitical tensions present significant implications for global markets and energy security. As supply routes come under threat, the potential for sustained price hikes looms large, impacting economies worldwide. Investors and governments alike must navigate these turbulent waters with caution, as the ramifications of these conflicts extend far beyond the immediate region, influencing everything from fuel prices to international relations.