Oil prices steady despite Middle East tensions, but risks are rising

In recent weeks, missile and drone attacks on cargo ships crossing the Red Sea have caused the biggest disruption to global trade since the COVID-19 pandemic. Despite delayed supplies, however, oil prices have remained surprisingly stable.

In response to Israel’s war on Gaza, Houthi rebels – the Iran-aligned Shia movement that controls northern Yemen and its western coastline – have launched a wave of assaults on ships in the Red Sea. By targeting vessels with perceived links to Israel, they are attempting to force Tel Aviv to stop the war and admit full humanitarian aid into Gaza. Houthis have launched at least 26 separate attacks since November 19 on merchant freighters.

Though no ships have yet been sunk, the United States recently dispatched a multinational naval task force to the region. On December 31, American Navy helicopters killed 10 Houthi fighters and sank three of the group’s speedboats.

The following day, Iran dispatched its Alborz warship to the Red Sea, compounding an already volatile situation. The government did not provide information on the vessel’s mission.

On Wednesday, Houthi rebels fired their largest barrage of projectiles yet, forcing an engagement with US and British naval forces. On Thursday night, the US and UK led a bombing campaign against multiple Houthi facilities in Yemen.

While Brent crude briefly topped $80 per barrel after Thursday’s air strikes, oil prices have mostly trended sideways in recent weeks. Market fundamentals suggest a balanced, or slightly surplus, market. And until there is a clear threat to global supply, traders appear to have relegated tensions in the Middle East to background noise.

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.

Some of the world’s largest shipping companies have suspended transit in the region, forcing vessels to sail around the Cape of Good Hope in Southern Africa. The lengthier route has raised freight rates due to higher fuel, crew and insurance costs.