The geopolitical landscape in the Middle East has been marked by escalating tensions and conflicts, with significant implications for the global economy, particularly the oil market. The region has witnessed a series of events, including the Houthi ship attacks in the Red Sea and Gulf of Aden, the Iran bombing, and the Israel conflict, all of which have contributed to a volatile environment.
The Houthi rebels, backed by Iran (suspected), have been launching attacks on ships traveling through the Red Sea and Gulf of Aden since the end of November. The Red Sea is a critical global shipping route and these attacks have forced tankers and cargo ships to reroute. It is important to note that these disruptions have not yet interrupted the flow of crude oil from the Middle East. These attacks were reportedly a response to Israel's war against Hamas in Gaza. The Houthis have stated that their campaign will continue until Israel halts the fighting in Gaza and humanitarian aid is allowed in.
The United States has accused Iran of supplying the Houthis with weapons, funding, and other support. In response to these attacks, the U.S. has launched several limited strikes aimed at weakening the Houthi group and securing ships passing through these critical waterways. Despite these efforts, the Houthis have continued their attacks on commercial ships, with over 30 incidents reported. The U.S. is attempting to manage this situation without escalating tensions in an already volatile region. However, defense officials have noted that strikes alone are unlikely to deter the Houthis, who have survived a decade of war and have gained an elevated status in a region angered by Israel's war in Gaza.
In addition to the Houthi ship attacks, there has been an escalation in hostilities between Iran and the U.S. An attack on a U.S. outpost in Jordan near the Syria border was reportedly carried out by Iranian-backed militants in Syria and Iraq. This attack result in three American soldiers being killed in a drone attack in Jordan and presents a significant challenge for the Biden administration, which has sought to avoid widening the conflict in the Middle East.
The administration is now faced with the decision of how to take stronger military and potentially much tougher economic action without sparking a major conflict with Tehran. The response to this attack is likely to be a significant factor in the upcoming political campaign, with some demanding a forceful strike back against Iran and its backed militias.
Crude Oil Impacts
The ongoing conflicts and the potential for further escalation pose a significant risk to the stability of the oil market. Any disruption in oil production or shipping routes could lead to a spike in oil prices, impacting economies worldwide. History suggests that escalating violence involving Iran can significantly impact oil prices. In 2019, attacks by Iran's Islamic Revolutionary Guard Corps and Houthi militants on assets in and around the Persian Gulf led to a 10% spike in oil prices in a single day.
Despite this, oil prices remained relatively stable, with traders adopting a wait-and-see approach. Prior to these conflict, futures on Brent crude oil had largely remained in the $70s and currently sits at ~$82.
.On the flip side the International Energy Agency (IEA) recently forecasted that the world would generate a substantial surplus of oil in 2024 due to slowing demand growth and increased production from non-OPEC countries, including the US, Brazil, and Guyana. This prediction underscores the challenges facing OPEC and its allies, who have lost market share by cutting production but have failed to trigger a significant rally in crude prices.
The lack of a rally in oil prices, despite recent events and OPEC+ production cuts, indicates a weakening demand. This has led experts, including Jeff Gundlach, to predict that oil could fall to $40 per barrel in 2024 due to deflationary pressures. While lower energy prices could benefit consumers, a significant drop in oil prices could indicate a decrease in demand, potentially leading to higher unemployment rates and a recession.
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