Quick Bites | Why oil isn’t surging with the Red Sea on fire

Crude oil has lifted in response to growing turmoil in the Red Sea, but it has hardly produced the spike in prices one might have expected. The Houthis are firing drones and missiles at ships responsible for around 12% of global shipping trade, forcing many carriers to divert around Africa, sending shipping costs rocketing, and causing supply disruptions. And yet, oil prices are still well below where many had expected given geopolitical tensions and efforts from Organization of the Petroleum Exporting Countries (OPEC) and its partners to restrain supply.

Some of the weakness can be attributed to the willingness of some OPEC+ participants to push up production, and to weaker demand from China (which is another story for another QB). But another swing factor has been the surge in US crude production, which jumped in the second half of 2023 to exceed the previous record that had been reached just before the pandemic.

As well as acting as a restraint on inflation, the US production surge underscores just how difficult it is for OPEC to achieve the sort of prices it wants. Even if it manages to take barrels out of the market, there is plenty of evidence that others will step in to provide more. Of course, domestic politics means President Biden will not broadcast this good news on oil production for fear of alienating the left wing of the Democratic party, which seeks environmental considerations to be put at the top of the priority list.

Source: Bloomberg 



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