Why are oil prices increasing again?
The price of Brent crude rose above $100 a barrel (€87.8) on July 24, nearly two weeks after the resumption of US and Iranian attacks in the Gulf region.
That represents an increase of about one-third from last month’s low, but still below the peak of $126 reached at the height of the conflict in April.
The latest surge in oil prices has been caused by a massive surge in the Red Sea, which could deal a further blow to efforts to export Gulf oil through alternative southern routes as the Strait of Hormuz is effectively closed.
Iran-backed Houthi rebels based in Yemen entered the conflict on Wednesday (July 22), claiming responsibility for attacks on two Saudi oil tankers, and threatening to further disrupt commercial traffic in the Red Sea.
The Red Sea route had become a relief valve, allowing Saudi Arabia and the United Arab Emirates (UAE) to continue partial oil exports via pipelines to ports outside the Gulf.
On Thursday night, the United States carried out its 12th night of strikes on Iran, targeting missile and drone storage facilities and air defense systems that it says Tehran uses to attack ships and its Gulf neighbors.
Meanwhile, Iran has shown no signs of backing down.
What does the Red Sea surge mean for oil markets?
Energy analysts believe that if the Red Sea blockade is fully implemented, it will be a double blow to the global energy sector after the Hormuz crisis.
Bab al-Mandeb, a narrow strait at the southern end of the Red Sea, is considered particularly vulnerable to the Houthi blockade.
According to George Lyon, Rystad Energy’s senior vice president and head of geopolitical analysis, about 2.5 million barrels of Saudi oil was moving through Bab al-Mandeb before the Houthi attacks.
The Red Sea route allowed Saudi and the UAE to export about 6.8 million barrels of crude oil per day – about half the normal volume through the Strait of Hormuz.
Saudi Arabia has also used pipelines through Egypt to export oil through one of the North African country’s Mediterranean ports.
Lyon said the oil market is becoming “increasingly dependent” on the Red Sea route and warned of a “significant surge in oil prices” if both routes become inaccessible.
On Tuesday, before the Houthi attacks, Goldman Sachs warned that oil prices could rise to $120 a barrel by the fourth quarter if the Strait of Hormuz remains closed. The bank’s base case is for Brent crude to remain stable around $80.
How soon will higher oil prices affect consumers?
Average U.S. gas prices reached $4.09 on Thursday, up from $3.92 a month earlier, according to American Automobile Association data.
“It’s going to come down, probably lower than when we started – but just give me a little time,” US President Donald Trump said when asked about surging oil prices during an event near Atlanta, Georgia on Wednesday.
On Wednesday, Germany’s largest auto club ADAC said that shortly after the interim peace deal was agreed, a liter of gasoline had climbed to about €2.15, an increase of 33 cents from the recent low. Diesel prices rose to around €2.18, compared with €1.73 a month earlier.
A similar picture is emerging globally, with significant increases recorded in Pakistan and the Philippines. Across India, prices are mostly unchanged for now, as national oil companies absorb the additional costs.
How could fuel prices rise even higher?
A prolonged blockade of the world’s two most strategic maritime chokepoints would raise the possibility of a new blow to global oil supplies.
Shipping companies can still reroute through Southern Africa, but this adds four weeks to the journey and increases fuel costs to more than $1 million per trip, which is then passed on to consumers and businesses.
War-risk insurance premiums for the Red Sea have also increased since the Houthi threat.
During the first weeks of the Iran war, the US and several other countries released millions of barrels of oil from their strategic oil reserves to help reduce rising prices.
As these emergency supplies are now significantly depleted, some energy analysts warn that refilling efforts at current rates will be more costly and could push oil prices higher.
Jun Goh, senior oil analyst at Sparta Commodities, warned in a research note this week that the US could impose export restrictions on crude or refined products to give priority to domestic consumers.
The US, the world’s largest oil exporter, increased global deliveries during the war, reaching 5.6 million barrels per day in April, according to the US Energy Information Administration.
Meanwhile, China, the world’s largest oil importer, cut its purchases to the lowest level in nearly a decade in the first months of the war, partly due to low demand and huge stockpiles.
With large commercial stocks gradually declining, many analysts expect Beijing to increase imports in the second half of the year, which could put further pressure on prices.
Edited by: Tim Rooks
This piece was first published July 23 and has been updated to reflect the rise in the price of Brent crude.