Iranian Warship Entry Into Red Sea Triggers Oil Price Surge: 'Any Escalation...Is Certainly Going To Add More Of A Risk Premium On Brent': Report

In a recent development, oil prices have skyrocketed due to the arrival of an Iranian warship in the Red Sea, intensifying the already heightened tension in this critical global shipping pathway.

What Happened: As reported by CNBC on Tuesday, following the Iranian warship’s entry into the Red Sea, oil prices witnessed a spike. Global crude benchmark Brent saw a 2.5% rise, hitting $78.97 a barrel, while U.S. West Texas Intermediate also experienced a similar uptick, at $73.43 per barrel.

On Monday, the Iranian state media confirmed that the Alborz destroyer had made its way through the strategic Bab al-Mandeb Strait. However, the specific mission of the warship remains undisclosed. Iran periodically carries out operations in the Red Sea to ensure the security of shipping routes.

The move is seen as a response to the U.S. Navy’s recent destruction of three boats belonging to the Houthi rebels, which Iran backs. The U.S. Central Command confirmed the action, which resulted in the loss of 10 militants.

However, a Houthi rebel spokesperson claimed that the boats were on “official duties to secure maritime routes.: The Houthi group has been known to target vessels in the Red Sea, primarily those associated with Israel.

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

Neil Beveridge, Senior Energy Analyst at Bernstein, commented, “Any escalation of conflict in this region is certainly going to add more of a risk premium on Brent,”

However, he also added that a significant impact is unlikely at this stage unless the situation worsens.

The increased tension in the region has resulted in many major shipping companies avoiding the Suez Canal and Red Sea routes since early December, preferring to take a longer, more expensive route via southern Africa. However, the U.S.’s launch of Operation Prosperity Guardian has encouraged shipping giant Maersk to resume operations in the Red Sea and the Gulf of Aden.

Why It Matters: The Red Sea has been a focal point of escalating disruptions recently, with Houthi rebels based in Yemen targeting ships, causing a significant shift in global trade patterns. As per industry data from Flexport Inc., around half of the container ship fleet that typically passes through the Red Sea and Suez Canal is rerouting to avoid the area.

The persistent tensions in the Red Sea following the attacks led to oil prices registering gains for a second consecutive week in December 2023. U.S. benchmark oil futures contract Nymex WTI was up 1.1%, setting it up for a weekly gain of 4.6%. European benchmark Brent crude was up 1% at $80.18 per barrel, up 4.7% on the week.

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