Quick Bites | The rising risk of an oil price spike

News that three US service personnel had been killed in a drone attack on a base in Jordan briefly pushed the price of Brent crude oil to a 12-week high of USD 84/barrel (bbl) the other week. While the market gave back most of its early gains, Brent was still trading at around USD 82/bbl as of 30 January 2024, up 12% from mid-December lows of around USD 73/bbl. The spreading conflict in the Middle East is the most immediate concern for energy markets.  


US President Biden blamed Iran-backed militant groups for the US deaths in Jordan and pledged to hold those responsible to account. Iran denied involvement, but the deaths increase the danger of direct clashes between the US and Iran. In turn, this increases the risk that an escalating spiral of violence could spread to the Straits of Hormuz, disrupting the flows of Gulf oil and liquefied natural gas to global markets. 


This risk is growing against a backdrop of increasing energy market risk elsewhere in the region and beyond. Last Friday’s Houthi missile strike on a tanker carrying a highly flammable cargo of Russian naphtha through the Gulf of Aden marks an escalation in regional dangers. 


Yemen’s Houthis do not appear to be ready to back down, and the higher the risk of indiscriminate attacks against ships, the bigger the incentive for shippers to reroute vessels to avoid the Gulf of Aden and the Red Sea entirely. 


For oil cargos that means rerouting around Africa, adding at least 6,000 km (about 3728.23 mi) and 10 days (about 1 and a half weeks) to voyages. The resulting increase in charter costs – daily rates for a 1 million bbl tanker have doubled in the last six months – and the cost of financing cargo adds more than USD 1 to the cost of each barrel of oil, on top of the heightened general risk premium. 


Meanwhile, other near-term factors are also helping to push the price of oil higher. Russia is finding it more difficult to export oil and refined products. This is partly because of Ukrainian drone strikes against its export facilities in the Baltic and Black Sea. But it is also because the US is increasing pressure on its allies not to service Russian exports.  


Add to this that Chinese import demand remained strong in December as China continued to fill its oil storage facilities, while US production dropped in January with a marked drawdown in US crude stocks, it appears that near-term factors favour an oil price above USD 80/bbl. 


In the light of constraints on production and robust GDP data from the US, signs of stabilisation in Europe and China’s continued strong demand, market participants and financial players are adding to net long positions in the oil futures market. As a result, it looks increasingly likely that the oil price will be well supported, with Brent crude averaging above USD 80/bbl through the early months of 2024 and the possibility of a price spike if tensions escalate rising by the day. 

Source: Gavekal Research/Macrobond 


Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770.  The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.