Power Up: Red Sea tensions rattle oil market

March 17 - By Ron Bousso, Energy Columnist

Hello there Power Up readers!

Geopolitics is once again dominating oil markets after the United States launched extensive attacks on Yemen's Houthis over the weekend. Washington has vowed to keep up the strikes until the Iranian-backed group stops targeting ships on the vital Red Sea trade route. The fresh violence has all the components needed to escalate into a broad regional conflict. More on this below.

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YEMEN TROUBLE

Heavy U.S. airstrikes on Houthi targets across Yemen on Saturday represent the biggest U.S. military operation in the Middle East sincePresident Donald Trump took office in January. One U.S. official told Reuters the campaign might continue for weeks as Trump has vowed to use "overwhelming lethal force" and warned Tehran to stop supporting the group immediately.

Benchmark Brent crude oil prices were up by over 1% at around $71.50 a barrel by mid-day in London.

The Houthis have become the focus of much global concern since they began disrupting international shipping in the Red Sea in October 2023, shortly after the eruption of violence between Hamas and Israel.

The group has since targeted multiple vessels with missiles and drones, forcing firms to re-route to avoid going through the Suez Canal, leading to longer and more expensive journeys. This has added to global inflationary concerns.

U.S.-led Western air forces have hit Houthi targets several times in recent months, but to little effect. The Houthis have also launched drone and ballistic missile attacks on Israel, prompting Israel to launch its own round of aerial bombardments across the country.

The Shia rebel group, which controls large swathes of Yemen, is no stranger to heavy aerial bombardments. Years of civil war in the country saw Saudi-led coalition forces, which backed the country's Sunni government, drop huge amounts of ordnance on Houthi targets.

During that time, Houthi forces also targeted Saudi energy infrastructure. The attacks on both sides, however, failed to break the deadlock in the bloody seven-year conflict that ended in a truce in 2022.

So while Trump has vowed to "rain hell" on the Houthis if they don't stop the maritime attacks, it is unclear how effective further air strikes will be.

Putting pressure on Iran, on the other hand, could prove more effective. Trump and his hawkish administration have been blowing hot and cold on Tehran in recent months in an effort to resolve the years-long tensions over Iran's nuclear programme, which the West fears could soon be capable of making atomic weapons.

Last week, Trump said he wanted to negotiate a nuclear deal with Iran and sent a letter to its leadership suggesting talks with the Islamic Republic. Iran said on Monday it will respond to Trump's invitation after proper scrutiny of the proposal.

At the same time, Trump's administration has been ratcheting up economic pressure on Tehran with new sanctions as part of a "maximum pressure" campaign, which has targeted Iran's oil tanker fleet and an electricity deal with Iraq.

And following the latest attacks on the Houthis, U.S. Defense Secretary Pete Hegseth said that "Iran has been enabling the Houthis for far too long," adding: "they better back off." Trump himself said if Iran threatened the United States, "America will hold you fully accountable and, we won't be nice about it!"

The risk of Houthis targeting the interests of the United States and its allies, including Israel, Saudi Arabia and the United Arab Emirates, appears high.

An attack on oil and gas facilities across the Middle East could disrupt supplies from the major producers, leading to a spike in energy prices. Saudi Arabia and the UAE together produce around 12 million barrels of oil per day, roughly 11% of global demand.

Any direct U.S. attacks on Iran would undoubtedly lead to a severe escalation in regional tensions. Iran has in the past repeatedly threatened to block the Strait of Hormuz, through which around 20% of global oil and gas supplies flow, in response to attacks.

For now, the market reaction suggests the risk of an all-out regional conflagration is still low, but that could change rapidly.

Essential reading

Beyond the Middle East, markets have been digesting a Chinese data dump that offered crucial insights on the health of the world's second-largest economy. The Chinese National Bureau of Statistics (NBS) data showed that thermal power generation in the country, fuelled mainly by coal, fell at the beginning of the year, one of only a handful of times it has declined during the January-February period in more than two decades.

And Reuters columnist Clyde Russell points out that Chinese refiners dipped slightly into crude stockpiles for the first time in 18 months, a seemingly bullish sign, but that was nevertheless most likely a result of weak imports.

Staying in Asia, Reuters correspondent Trixie Yap took a look at how Asia's ability to supply sustainable aviation fuel will outpace regional demand this year and next as more production comes online, increasing exports and potentially lowering prices for the fuel.

In Europe, EU countries are discussing making the bloc's binding gas storage goals more flexible, over concerns that the rules risk inflating gas prices, a negotiating document seen by Reuters showed.

And Germany's economy and energy minister critiqued talks to revive the Nord Stream gas pipelines to relaunch Russian gas flows to Germany, arguing it would mean going in "completely the wrong direction".

Finally, Reuters columnist Mike Dolan writes about how seemingly erratic U.S. policy-making may be weakening the dollar as much as any potential 'Mar-a-Lago accord' could have hoped, but it risks taking U.S. asset prices down with it.

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