Oil traders are, for now, looking beyond rising tensions in the Red Sea. But that may not last, a senior Wall Street commodities analyst warned in a note Tuesday.
Iran's decision to send a warship to the Red Sea briefly worried oil traders on Tuesday, as crude oil prices quickly fell back into negative territory after a strong early rally. Brent crude BRN00,
Global index, West Texas Intermediate crude CL.1,
Both ended Tuesday at their lowest levels since December 13.
Futures saw further losses in early trading on Wednesday.
Market participants have broadly accepted the idea that the war between Israel and Hamas will remain largely confined to Gaza and does not pose a threat to shipments of crude oil supplies from the Middle East, said Helima Croft, head of global commodities strategy at RBC Capital Markets. , in a note Tuesday.
“However, we continue to see a clear and present risk that this will become a broader regional conflict, with three flashpoints raising particular contagion concerns,” she wrote.
“Iran is at the heart of all three threat vectors, and the question of whether the conflict in Gaza will spread will likely depend on whether Tehran maintains any appreciable degree of distance from its proxies or becomes a key figure, either through its direct actions or because it is targeted for retaliation against Its vast armed network.”
Here are the three potential flashpoints worth watching, according to Croft:
Houthi attacks on ships
The map below indicates major events around the Red Sea in recent weeks:
The Iranian warship Alborz has entered the Red Sea, media reported citing Iran's semi-official Tasnim news agency on Monday, but without providing details about the ship's mission.
This came after the US military said on Sunday that its forces opened fire on Iran-backed Houthi rebels based in Yemen after they attacked a Maersk ship.
A cargo ship in the Red Sea, killing a number of rebels and destroying three boats in an escalation of the maritime conflict linked to the war in Gaza. Maersk said on Tuesday that it would suspend all transportation operations through the Red Sea and Gulf of Aden until further notice.
Croft noted that there are indications that the United States and the United Kingdom are preparing for a larger military operation against the Houthis in Yemen. If so, the key question is whether Iran will remain a bystander.
Croft said it is also worth noting that Saudi Arabia is urging restraint in response to growing unrest in the Red Sea. Houthi attacks on Saudi targets have declined since the calming of Saudi-Iranian tensions last March. She added that a more serious confrontation between the United States, the Houthis, and Iran could jeopardize the new security gains made by Saudi Arabia.
Lebanon and Hezbollah
Senior officials in the Biden administration have made repeated visits to Beirut recently, in an attempt to avoid opening a second war front on Israel's northern border that pits the country's armed forces against the Hezbollah militant movement.
Israel and Hezbollah have exchanged fire since the start of the war between Israel and Hamas on October 7, but operations have remained relatively under control. But tensions and fighting have increased in recent weeks.
Croft said that expanding the conflict into Lebanon would provide a “clear path” to a broader regional war given the very close operational relationship between Iran and Hezbollah, noting that Tehran's relations with the group are much stronger than its alliance with the Houthis.
Croft added that a more direct Iranian role in the war would sharply increase the threat to regional energy supplies – not only because of Iran's energy assets, but also because of its ability to limit traffic through the Strait of Hormuz (see map below).
The Strait is a narrow waterway connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea. The width of the corridor at its narrowest point is only 21 miles, while the width of the shipping corridor in both directions is only two miles and is separated by a two-mile buffer zone. It is the most sensitive choke point for oil transportation in the world.
“While much of the current market focus is on the Red Sea and the Bab al-Mandab chokepoint, the Strait of Hormuz is far more important for global energy supplies, with an average of 15 million barrels per day of OPEC+ crude passing through the Red Sea.” “Waterway in 2023,” Croft said.
Iraq – Fiery clashes
Croft noted that Iranian-backed militias fired hundreds of missiles at bases housing American forces and areas close to American personnel in Iraq and Syria, which led to a series of escalating retaliatory strikes by the US military.
She added: “Although militia attacks resulted in the injury of many American soldiers, no American soldier has been killed so far.” “We do not know whether President Biden shares his predecessor’s kinetic red line on the loss of American lives. However, we believe that if continued attacks by Iranian-backed forces lead to significant American casualties, Washington may find itself drawn back into another round of active combat in Iraq.
The potential for personnel changes in the Biden administration during an election year is also worth watching, Croft said.
“Given the relatively small number of officials shaping the response to the war, any departure from this team could have implications for key aspects of White House engagement,” she said.