End-Of-Year Rally For Oil As Red Sea Tensions Drive Up Shipping Costs

Oil prices were up on Wednesday, marking a third-straight day of gains and notching a 9% increase over the past week as tensions in the Middle East increase.

Brent crude gained 1.1% on Wednesday to move back above $80 a barrel for the first time since Dec. 1. The European benchmark oil futures contract has now risen nearly 5% in the past three days and is up 8.8% in the past week.

Nymex WTI, the U.S. benchmark, was up 1.5% on Wednesday at $75.06 a barrel. It has also risen 5% over the past three trading sessions and is up 9.4% over the past week.

The United States Oil Fund USO, an exchange-traded fund which tracks prices of light-sweet crude, was up 0.9% at $70, and has gained 8.9% over the past week.

Shippers Pull Out As Rebel Attacks Continue

Crude prices have gained in recent sessions due to rising tensions in the Middle East. This increase is partly in response to a series of attacks by Yemeni Houthi rebels in the Red Sea, a critical route for oil tankers heading to Europe and the U.S. East Coast, as reported by Reuters.

BP BP is the only oil major, as yet, to announce the suspension of shipments through the Red Sea. Other container shipping companies have done the same, with Maersk and Hapag-Lloyd also announcing suspensions through the area.

Companies that continue shipping through the region face higher insurance costs. Insurance adviser Joint War Committee has already expanded the listed areas of the Red Sea requiring war-risk insurance coverage, and insurance providers to the marine industry such as Lloyds of London are likely to increase rates, said Leo Mariani, managing director at Roth.

Also Read: Oil Prices Jump As BP Halts Shipments Through Red Sea After Rebel Attacks

Alternative Route Adds To Costs

Those shippers that have already suspended routes through the Red Sea, that links Arabian Gulf oil production sites with Europe through the Suez Canal and Mediterranean, are taking a much longer route around the Cape of Africa.

Michael Lynch, president of Strategic Energy and Economic Research, writing in Forbes on Wednesday, said that markets must realize that the inventory is not lost, only delayed by tankers having to take the longer route.

Tankers destined for the oil terminal at Rotterdam, for example, will be delayed around two weeks, while those en route to North America are likely to experience delays of around 10 days.

“Companies and traders will be aware that the oil will eventually arrive and restore inventories to near normal levels and so the spike in oil prices should remain brief and limited,” Lynch said.

However, if attacks in the region persist as a long-term issue, the additional expenses incurred from either taking longer alternative routes or the heightened insurance fees for continuing to use the Red Sea route are expected to contribute to an increase in oil prices.

Shipping Costs Are Rising

Bank of America highlighted the increase in shipping costs in a note this week, saying the Suez Canal had become a key choke point for global trade, causing delays, diversions and higher freight rates.

The deployment of U.S. and U.K. warships to the region, where they have been actively intercepting Houthi drones, introduces a potential for further escalation. This is especially pertinent given Iran’s support for the Yemeni rebels, which adds a layer of complexity to the situation.

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