Brent Crude Climbs Above $116 as Saudi Attacks and Hormuz Tensions Mount

Synopsis

Brent crude futures climbed 3.1 per cent to around $116.72 a barrel on Friday, ending its longest sell-off since September 14 in nearly six months. The rally was spurred by Houthis attacks within Saudi Arabia and record-high ship attacks near the Strait of Hormuz this month. A major disruption will give little time to importers including India to cope with the drop in emergency stocks, which are at their multidecade lows due to this year's record releases, analysts say.

International benchmark (Brent) crude closed the week at its longest period of the year at its highest level in nearly six months on Friday. Saudi Arabia's government, already concerned about the strain on energy supply routes from the US-Israel war on Iran, was now worrying about a tightening of the already narrow energy supply routes if a series of attacks by Houthis in Saudi Arabia continued. Brent was trading at $116.72 a barrel, 3.1 per cent higher for the day, tradingeconomics reported.

A week of strikes that attacked Saudi's infrastructure

West Texas Intermediate (WTI) futures ended above $103, up over 6 per cent on the week, as Brent futures rose more than 6 per cent. The attacks in the Red Sea port of Yanbu and on an oil field and an airport in the kingdom were by Iranian-backed Houthi militants, Bloomberg reported. Brent's $117.45 session peak was the highest in almost six months, Reuters reported.

The advance was spurred by worries that the Houthis could cause disruptions after unleashing attacks on Saudi Arabia that included energy infrastructure, according to Adam Turnquist, chief cross-asset strategist at LPL Financial. On Thursday, Saudi Aramco also evacuated its operations at its Dhahran headquarters due to increased fighting with the Houthis, Reuters reported.

Even though the economy is growing, Hormuz is still the bigger variable

October is the worst month in the history of attacks on commercial shipping in or near the Strait of Hormuz since a Washington-based think tank started keeping track of such incidents in 2017. On Thursday, Iran's Islamic Revolutionary Guard Corps (IRGC) said it had sunk seven additional tankers, a statement that was dismissed by Washington.

The risks are high. Al Jazeera reports that before the war began Feb. 28, a fifth of the world's oil and liquefied natural gas, equivalent to 20 million barrels a day, flowed through the strait. The Saudi Arabia has diverted crude west to Yanbu via its East-West Pipeline. There is another exposure to that route: the Houthis blocked Saudi shipping in July. Only 373,000 bpd of Saudi crude had transited Bab al-Mandeb so far this month, the lowest since February, Kpler analyst Muyu Xu told Al Jazeera.

There's a counter-signal. Secretary of State Scott Bessent included in his presentation a chart from the Treasury Department that suggests the export of crude and condensate through Hormuz, the Gulf of Oman and Red Sea has returned to 17–18 million barrels per day, Fox News reported.

Thin buffers

On March 11, the 32 members of the International Energy Agency (IEA) decided to send 400 million barrels, almost twice as many as they released after Russia invaded Ukraine in 2022. The U.S. Department of Energy has since lowered the U.S. Strategic Petroleum Reserve from 375 million to 283 million barrels, its lowest since October 1982.

Sparta Commodities crude analyst Aaron Kildow projected that there are still around 400 million barrels available globally, if China doesn't keep building up its stockpile and that of the main Gulf producers doesn't keep rising. Following the initial closure, world was blessed, according to Chris Beauchamp, chief market analyst of IG Group.

European importers would be the first hit by the squeeze. India and Pakistan are among the most vulnerable, as their other available source of supply is located in West Africa in 25 to 28 day’s time as against just two days from Fujairah, Kildow said. The coverage of India's reserves is only for 8 days of imports, according to Reuters. Diesel is already selling for almost twice the price of crude, says the IEA.

Outlook

No progress has been made in the peace talks, Al Jazeera reports. The price direction will be determined by whether the Saudi attacks continue and how fast the countries consuming the oil can restock their supplies and how the Hormuz incidents affect them.