Houthi strikes have little impact in a world awash with oil

Reuters/Khaled Abdullah

Missiles and drones fly across the Bab Al Mandab, Houthi military facilities in Yemen are pounded by US and British forces, Red Sea maritime traffic is down 70 percent – and all against the background of the biggest conflict seen in the Middle East for years.

Meanwhile, the price of Brent crude oil is stuck stubbornly in the $75-$80 per barrel range. News of retaliation by the West against Houthi installations sent the benchmark above $80 for a moment last week, only for it to fall back just as quickly.

Obviously, the oil trading world can see nothing to trouble the benign outlook on supply that has become the accepted wisdom in the crude hubs of Geneva, Singapore and Dubai. 

US shale is going gangbusters, Russia is still managing to circumvent sanctions – although a recent blip in its oil business with India could be significant, more on which below – and sanctioned Iran is doing likewise.

Output from the western hemisphere – Venezuela, Brazil, even Guyana – is growing steadily. The world is apparently awash in oceans of the black stuff.

Opec+ has little to offer to change that situation. It has in effect kicked the can down the road until the end of March with its announcement of continuing cuts last December, which itself was a continuation of the tight regime it has been overseeing more or less continually since the Covid outbreak.

The group finds itself locked into a cycle of cuts that have maintained the crude price at current levels – with a blip or two along the way – though at the cost of lost revenue to member countries.

Both Saudi Arabia and the UAE are sitting on massive potential capacity. But in the current circumstances there is little chance that those millions of barrels – at least 5 million barrels per day – can be deployed without savaging the price of Brent crude. You have to ask: is this what “stranded assets” look like?

There is not much on the demand-side horizon that can alter that situation in the short term, at least on the upside.

The Chinese economy continues to labour as analysts ask whether it can recover from the pandemic-induced recession. Projected GDP growth of 4 percent this year is respectable enough, but is overshadowed by worries about the Chinese financial system and real estate markets.

Reuters/Hamad l Mohammed

India, the world’s second biggest importer, is expanding rapidly, its economy being projected to grow by more than 6 percent this year.

Until recently the country was doing more than any other to help Russia get over the sanctions imposed by the West after the invasion of Ukraine – until an interesting development in December.

India’s imports of Russian oil fell to a year low as tankers laden with Sokol grade crude could not offload. The Indian energy authorities dismissed reports that this was down to glitches in payment mechanisms caused by the sanctions and cited rising Russian prices instead. Either way, Indian appetite for Russian oil looks sated for the time being.

Middle East producers are aware of the pressures in Asia. Saudi Aramco recently lowered its official selling price (OSP) to the lowest level in more than two years. OSPs – offers to sell at a fixed price for a short term – do not affect long-term contracted prices, but are a sign of overall market health.

If demand is becalmed, there are a number of factors that may affect short-term supply, outside Opec+ action.

With Houthi missiles and drones in the air, many have begun to recall the 2019 Iranian-inspired attacks on Saudi Arabia – and their effect on oil prices.

After the strikes on Aramco’s Abqaiq and Kurais facilities, half the kingdom’s production was halted temporarily and global prices surged by 20 percent.

The prevailing view is that the resumption of Saudi-Iran diplomatic relations makes a rerun of that scenario more unlikely, even given the unpredictable nature of decision-making by the increasingly independent Houthis.

But western intervention in the Red Sea does increase the possibility of the “Big One” – a confrontation in the Arabian Gulf that could shut the Straits of Hormuz and cut off 20 percent of the world’s crude at a stroke – a far bigger hit than the 8 percent that passes through the Red Sea.

We are still – thankfully – a long way from that.

But the mere fact that traders are looking at Hormuz closure as the only event that can significantly lift prices tells us a lot about the fundamentals of supply and demand in today’s crude markets.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia