Why is the Red Sea crisis not affecting the energy markets/ Is the price of oil pregnant with big changes?

Online Economy – Arash Nasiri: A month-long wave of Yemeni Houthi attacks on ships in the Red Sea has terrified shipping companies and caused ships to divert from the danger zone, even as the US and British navies continue retaliatory strikes against the Houthis. What the relentless and escalating attacks have not done, however, is do much to disrupt energy markets.

Indeed, just where about 12% of the world’s seaborne oil transit is, this stability of the energy market is surprising, and after more than a month of continuous rocket and missile attacks on a variety of commercial vessels in the Red Sea, which is part of The Houthis’ campaign to punish Israel for its invasion of the Gaza Strip saw Brent crude oil prices in London about $78 a barrel lower than they were in early December. The US benchmark price has barely changed since late November, remaining around $73 a barrel.

But what is the reason for the non-reaction of the energy markets? There seem to be many reasons, and the fundamentals of the oil market explain many of the reactions. The first is the point that Foreign Policy has mentioned in its recent report. Bab al-Mandab, which the Houthis make impassable, is not the same as the Strait of Hormuz: the former is a convenient route to Suez and Europe, but has alternatives, while the latter is itself a vital oil source and conduit.

Another reason for the lack of reaction, as John Kemp of Reuters wrote in his recent column, is that everyone expects demand for oil to rise this year by about the same rate as production in the United States, Brazil and Guyana, which is why oil prices It does not increase even in the face of major supply disruptions and a real disruption.

For example, this week we saw a decrease in crude oil production in North Dakota between 650,000 and 700,000 barrels per day, which is a significant amount of daily production. But it seems that this reduction has not had any effect on the international price of oil. Because everyone expects this production to be back on track as soon as the last cold snap ends.

In fact, this is not an unprecedented event. A year ago, with the Russia-Ukraine war escalating, OPEC production cuts and Russian oil under sanctions, the world expected a relatively tighter oil market, meaning supply may be hard-pressed to keep up with demand. . Instead, it saw record-breaking oil production from countries such as the United States, Brazil, Canada and Little Guyana. Even Iran, still operating under US sanctions, adds half a million barrels per day to global production.

At the same time, global demand for crude oil has not picked up as much as expected, especially in late 2023. Another key reason is that China’s appetite for oil died after the pandemic hit late last year and global demand growth slowed sharply. The International Energy Agency, in its latest oil market outlook, expects this trend to continue; Because, on the one hand, China’s economic problems and the country’s policy to transition from fossil fuels and support the spread of electric cars, which is being implemented on a large scale, will fuel the decrease in oil demand from this country even more than what happened in 2023. , even if China’s economic growth rate for the fourth quarter shows a figure of 5.2 percent.

Oil prices are not rising even as container ships and tankers swap the Red Sea and Suez Canal for the much longer route around Africa and the Cape of Good Hope. This swap should raise the price of oil; Because it inevitably leads to an increase in fuel demand. However, no one seems to be thinking about that, staying focused on Chinese demand and US supply, and the fact that the Strait of Hormuz is not going to be closed.

In this regard, Kevin Book, managing director of an energy consulting firm in Washington, said: “These are threats to transportation in the region, not to production. “While some energy companies, such as Shell and BP, have rerouted their tankers to avoid the Red Sea, this only adds to travel time and cost – it does not take oil out of the market.”

“Delivery delays are different than losing that energy,” Bock said. Meanwhile, top Chevron executives expressed surprise that West Texas Intermediate was not trading at a higher price, saying “the risks in the Red Sea are very real.” They are probably not the only ones who are surprised.

Mike Wirth told CNBC this week, “A lot of the world’s oil is flowing in that region that would have been cut off, I think you could see things change very quickly.”

However, most oil market players seem to consider this risk relatively unlikely or, as Kemp pointed out in Reuters, avoid starting to catastrophize about prices; This is because the probability of a major supply disruption in the Middle East is actually low and there is backup supply from OPEC itself.

OPEC excess capacity discussion is popular among analysts. In fact, OPEC and its OPEC+ partners have a combined excess capacity of more than 4 million barrels per day. However, this does not matter in the least, unless these producing countries decide to use it. Now, they do the exact opposite. They effectively increase their excess capacity by reducing actual production. And they won’t change course until prices rise, which they will only do if there’s a supply disruption.

But the situation could still worsen in the region, especially given the Biden administration’s continued efforts to attack Houthi positions, raising the prospect of direct attacks on oil tankers and other energy assets. Energy prices have so far held their breath, but that could all change, especially if Iran ramps up its efforts to confront the American coalition that has actually formed in support of Israel.

“I would say that the risk of contagion and fire has been underestimated,” Bock said. “If we get to a point where escalation becomes a production risk, which is quite possible, we could see prices rise.”