Explained: How will the recent US, UK attacks on the Houthis in Red Sea impact the global oil market?

By Team Asianet Newsable | First Published Jan 12, 2024, 6:53 PM IST

The US and UK have stepped up their operations against the Houthis over the Red Sea blockade. The global oil market is set to react strongly over the escalation of the conflict which could in turn result in the global oil prices hitting another upper circuit in the coming weeks.

The World has stepped into 2024 with another rocky and uncertain start. The Global supply chains are disrupted as a result of the two conflicts in the Middle East Region. Oil prices across the globe have shot up in the recent few weeks due to the blockade in the Red Sea by the Houthis. One of the world's busiest shipping routes is inactive due to the illegal occupation of the Houthis.

All these have contributed to uncertainty, especially in the global oil market. The Iran-backed Houthis group has been acting as pirates by hijacking and attacking ships that pass the Red Sea. Many big shipping companies have started avoiding the route causing major disruption in the global markets. The US and UK recently stepped up to fight against the Houthi terrorists.

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Both the nation's navy have worked closely especially this week to draw back the militant group. The Houthis also suffered casualties after attacks from the US Navy engulfed their ships. Though the US taking up the role of a global leader in crucial times is a positive light amidst the dark clouds but oil market is expected to go up due to the risk of conflict escalation.

The Houthis have warned the US of retaliatory strikes due to the current casualties. Many field experts believe that the Brent crude price could very well hit $80 per barrel which could then increase the inflation rate worldwide. The OPEC+ group is focusing on production cuts to drive the oil price further. The lack of response from China and other regional leaders like Turkey has also surprised analysts casting doubts on the future and the longevity of the conflict.

Vanda Insights’ Vandana Hari said, “Quite a bit of the new risk premium has already been priced in. We might see crude stacking on another dollar or two... I expect a degree of restraint and back-channel diplomacy to keep the tensions from spiraling out of control and causing a regional conflagration.

The fluctuations in prices will absolutely remain in place as the situation develops. It's an uneven tug of war between a bearish outlook on fundamentals and a supportive Mideast risk premium. As of now, both can be expected to remain in play for the next few months.”

UBS Group's AG Giovanni Staunovo said, “Oil's bounce was driven by the market's perception that this is an escalation of the conflict. Any risk premium will only sustain if there are disruptions to the oil supply. We look for higher prices over the coming months, expecting Brent crude to move above $80 a barrel, as a result of OPEC+ production cuts keeping the oil market slightly undersupplied.”

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