(Bloomberg) — Oil prices jumped as the U.S. and its allies launched airstrikes against Houthi rebels in Yemen, retaliating for attacks on ships in the Red Sea that have threatened the flow of fuel and goods through the vital waterway.
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President Joe Biden said strikes were carried out against a number of targets of the Iran-backed group, with US officials saying radars and rocket launchers were hit. A tanker industry group said forces in the region were advising ships to avoid a key chokepoint near Yemen. The Houthis said all U.S. and British interests were now legitimate targets.
Global benchmark Brent rose as much as 3.6% to above $80 a barrel in London for the first time this year as investors tried to gauge whether the escalation in hostilities would spark a wider conflict in the Middle East.
Tensions have been rising in the region since the October 7 massacre of Israelis by Hamas, which is considered a terrorist group by the United States and the European Union. The Houthis have fired rockets at ships almost daily for the past two months and vowed not to let up until Israel ends its assault on Gaza.
The biggest upside risk to prices concerns Iran and whether it becomes directly involved in the conflict, which could threaten oil supplies in a region that produces a third of the world's crude. The war risk premium had previously declined due to ample output from non-OPEC+ producers and slowing demand growth.
“The fear in the oil market is that the region is on an unpredictable escalation path where oil supply will actually be lost at some point in the future,” said Bjarne Schieldrop, chief commodities analyst at SEB AB.
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The Houthis launched their largest-ever attack on shipping in the Red Sea earlier this week, despite the presence of a US-led naval force. This sparked warnings of retaliation from Washington. Iran also seized a tanker off the coast of Oman on Thursday, further aggravating the situation.
Biden left open the possibility of further steps against the Houthis.
“I will not hesitate to take further action as necessary to protect our people and the free flow of international trade,” he said.
Meanwhile, Iran condemned the attacks between the US and Britain. The State Department said they would only fuel insecurity and instability across the region, while the Houthis said they would not be deterred.
The Houthi attacks in the Red Sea have prompted many merchant vessels to reroute ships around the southern tip of Africa rather than risk passage through the waterway connected to the Suez Canal. So far, oil tanker markets had largely avoided the worst of these impacts.
The attacks sent Brent crude above its 50-day moving average for the first time since October. This move could lead to further buying from technical traders, although this indicator has been steadily declining over the past few weeks.
“Price fluctuations will definitely continue,” said Vandana Hari, founder of consulting firm Vanda Insights. “It is an uneven tug of war between a bearish outlook on fundamentals and a supportive risk premium for the Middle East. From now on it can be assumed that both will remain in the game.”
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