Oil prices extended losses on Friday as investors assessed Saudi Arabia’s proposal to lead a multinational maritime defense coalition aimed at bolstering security along key Red Sea shipping routes.
Saudi Arabia is seeking to spearhead a coalition to enhance defense cooperation in the Bab El-Mandeb Strait, the Red Sea and the Gulf of Aden. The Saudi defense ministry said 14 countries, including Turkey, Pakistan, Egypt, Sudan and Djibouti, had issued a joint statement backing the proposed maritime security alliance.
Brent crude prices traded at $88, down 1.16% or $1.03 per barrel, while US West Texas dipped over 2% to $81.70 per barrel. In the previous session, Brent crude settled down $1.71, or 1.88%, at $89.03 a barrel, although prices fluctuated sharply during the session.
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The benchmark briefly climbed to an intraday high of $93.31 after Washington and Tehran exchanged strikes on each other’s military targets once again. U.S. West Texas Intermediate crude futures fell 87 cents, or 1.03%, to settle at $83.59 a barrel after touching a session high of $85.94.
Tensions remain high
The latest developments came after Iran-backed Houthi militants in Yemen announced a naval blockade on Saudi Arabia last week, threatening shipping through the Red Sea, a crucial route for Saudi oil exports and an alternative to the largely blockaded Strait of Hormuz.
Meanwhile, Iran and Oman continued discussions on the management of the Strait of Hormuz, according to the Iranian Labour News Agency. However, on Wednesday, a senior Iranian official said Tehran had rejected Oman’s proposal for regional joint management of the strategic waterway.
The Strait of Hormuz, through which around one-fifth of global oil and liquefied natural gas flows normally pass, has remained a key focus for energy markets since the United States and Israel launched the war on Iran on February 28.
In another development, Egypt confirmed on Thursday that a drone strike caused the fire aboard two gas vessels at the Mediterranean port of Damietta, ruling out the possibility of an accidental blaze.
The confirmation followed an earlier assessment by British maritime security firm Ambrey, which said on Wednesday that a drone had struck a U.S.-owned gas storage tanker docked at the port, raising fresh concerns that the conflict in the Middle East could spread further, Reuters reported.
The U.S. military said it had struck dozens of Islamic Revolutionary Guard Corps targets in Iran in response to Tehran’s ballistic missile attacks on U.S. forces in the Middle East. The U.S. military also said no American aircraft were destroyed or damaged in the recent attempted Iranian attacks, rejecting a claim it said was made by Iran’s Revolutionary Guards that three U.S. F-35 fighter jets and three other aircraft had been destroyed.
Where are prices headed?
The direction of oil prices will depend heavily on how long the disruption lasts. JPMorgan estimates that every additional month of supply disruption could add around $7 to $8 a barrel to Brent prices. A three-month disruption could push monthly average Brent prices to about $114 a barrel.
Goldman Sachs has similarly warned that Brent could climb to $120 a barrel if shipping disruptions through the Strait of Hormuz, the world’s most important oil transit route, continue. Its base case is still that tensions in the Middle East will eventually ease.
Under that scenario, Goldman Sachs expects Brent to average $80 a barrel in the fourth quarter and $75 next year. However, the bank said the risks to those forecasts remain “tilted to the upside”, pointing to the possibility that shipping disruptions could persist through both the Strait of Hormuz and the Red Sea.
Anindya Banerjee, Head of Commodity Research at Kotak Securities, said geopolitical developments were once again driving crude oil prices. “Any strike on major Gulf export infrastructure could force a retest of $95-100 and beyond,” he said.
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According to Banerjee, the market has shifted its focus from the military action itself to the declining chances of a diplomatic breakthrough. Tehran has set new conditions for restarting negotiations, he said, while successive developments have delayed the return of normal tanker traffic through the Strait of Hormuz. Shipping activity through the waterway remains well below pre-war levels.
Tanker traffic through the Strait of Hormuz is still far below normal, keeping the underlying supply risk in place despite the easing of immediate price pressure.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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