Potential Effects Of Disruptions In Red Sea On Crude Oil, LNG Prices

Concerning attacks by Yemen’s Iran-aligned Houthi militants on ships in the Red Sea have been disrupting maritime trade and compelling several companies to reroute their vessels. Oil major BP has temporarily paused all transits through the crucial waterway.

Meanwhile, oil tanker group Frontline announced on Monday its vessels have to avoid passage through the Red Sea for the time being, signaling that the disturbance is broadening to include energy shipments. Oil prices advanced on Tuesday, extending gains from the previous session.

Unlikely To Have Major Effects

But Goldman Sachs has stressed that the disruption to energy flows in the critical Red Sea is unlikely to have substantial effects on crude oil and liquefied natural gas (LNG) prices as vessel redirection opportunities imply production should not be directly affected.

The investment bank said in a note dated Monday: “We do estimate that a hypothetical prolonged redirection of all 7 million barrels per day of gross … oil flows would raise spot crude prices relative to long-dated prices by $3-4/per barrel.”

Operation Prosperity Guardian

Meanwhile, in an effort to protect the free flow of commerce, innocent mariners and international law, the Pentagon on Monday announced the formation of a new international mission focused on countering attacks on commercial vessels in the Red Sea.

US Defence Secretary Lloyd Austin called it “an international challenge that demands collective action”. Operation Prosperity Guardian is a multinational security initiative involving several countries, including the US, Seychelles, Bahrain and the UK.

Major Commercial Corridor

The Iran-backed Houthi militants are allied with Hamas. Shortly after the outbreak of the Israel-Hamas conflict, the Houthis announced their intention to block Israeli ships from travelling across the Red Sea. But the attacks have mostly been against non-Israeli vessels.

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Austin is in the Middle East meeting various allied nations. He noted: “The Red Sea is a critical waterway that has been essential to freedom of navigation and a major commercial corridor that facilitates international trade.” Roughly 10% of annual global trade passes through it.