Ever since Iranian-backed Houthi rebels began attacking ships in the Red Sea in November, there’s been the risk that oil supplies could be disrupted, if the situation were to escalate—and in many ways, escalate it has. The Yemen-based rebels continue to attack commercial ships, which extended shipping times for companies choosing to instead go around the Horn of Africa, and increased shipping costs. Then, in late January, a drone attack in Jordan killed three U.S. service personnel and injured more than 30. That was the first time U.S. troops were killed by enemy fire in the Middle East since the beginning of the war in Gaza. Yet, contrary to what one might expect, crude prices have actually showed a lackluster performance.
In fact, crude futures have recently traded at mostly a sideways choppy pattern. Yes, there has been a $2/bbl to $4/bbl increase in prices, but that may have had more to do with cold weather-related production issues in the Dakotas than actual fear of oil transportation in the Middle East being disrupted.
Lower demand in China and U.S. dragging down prices
The point being made here is that more traders are beginning to fear a fall in global demand than they are a supply disruption by militants. Indeed, the facts so far support the greater risk of the former. One factor is slower economic growth in Asia, particularly in China. The Hang Seng Chinese Stock Index has shown a 7% to 8% drop, just since Jan. 1. When you take into account that China is globally the largest importer of crude oil, traders’ greater fear of falling demand—as opposed to fallout from the Red Sea attacks—is understandable.
Furthermore, China’s slow economic recovery is not the only potential headwind for oil prices. U.S. gasoline demand also dropped substantially in the last two months. Although a decline tends to occur this time of year, the degree is what’s surprising. Demand for this time of year is well below the five-year average, according to data from the U.S. Energy Information Administration (EIA). This decline might be due to the three-week-long major cold temperatures seen across the U.S., which may have put a damper on automobile travel. However, another more lasting factor may be the fact that it now seems that the Federal Reserve will keep U.S. interest rates higher for longer than many expected. These higher rates have been weighing on the average U.S. consumer’s pocketbook, which includes fuel purchasing.
Middle East conflict still a risk to oil supply
Even though demand is the bigger weight on traders’ minds right now, the Red Sea attacks and, moreover, the U.S.’ “shadow war” with Iran still has the potential to impact the global oil supply, and consequently, prices. Iran currently exports around 1 MMbbl/d. If a major event were to occur—such as the Houthi rebels were to sink an oil tanker, resulting in harder sanctions on Iranian oil—those million barrels a day of Iranian oil would certainly be missed.
That said, the resulting increase in prices would likely be minimal over the long run, as other OPEC nations could quickly fill the void. The last time the U.S. had a major attack on Iran was in 1987, and seemingly prices bolted approximately 3% higher the first few days, only to be right back down the following weeks.
Of course, as with any military engagement, anything can happen, and a major escalation to ground troop involvement by the U.S. and Iran could easily cause a very quick dramatic rise to prices. However, in the near-term, volatility will remain in focus, though all eyes will be on Middle East tensions in addition to global demand.
Recommended Reading
Not Sweating DeepSeek: Exxon, Chevron Plow Ahead on Data Center Power
2025-02-02 - The launch of the energy-efficient DeepSeek chatbot roiled tech and power markets in late January. But supermajors Exxon Mobil and Chevron continue to field intense demand for data-center power supply, driven by AI technology customers.
Ovintiv Names Terri King as Independent Board Member
2025-01-28 - Ovintiv Inc. has named former ConocoPhillips Chief Commercial Officer Terri King as a new independent member of its board of directors effective Jan. 31.
Murphy Shares Drop on 4Q Miss, but ’25 Plans Show Promise
2025-02-02 - Murphy Oil’s fourth-quarter 2024 output missed analysts’ expectations, but analysts see upside with a robust Eagle Ford Shale drilling program and the international E&P’s discovery offshore Vietnam.
Confirmed: Liberty Energy’s Chris Wright is 17th US Energy Secretary
2025-02-03 - Liberty Energy Founder Chris Wright, who was confirmed with bipartisan support on Feb. 3, aims to accelerate all forms of energy sources out of regulatory gridlock.
Enbridge Appoints Steven Williams to Chair of the Board
2025-03-12 - Enbridge has appointed Steven Williams to lead the board of directors following Pamela Carter’s retirement as chair.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you’re experiencing any technical problems, please contact our customer care team.