We have been following developments in the Red Sea closely as the U.S. and U.K. have started attacking Houthi militant targets across Yemen.
One consequence of this development is that oil prices have begun to surge.
Oil rose 1% on Friday as an increasing number of oil tankers diverted course from the Red Sea following overnight air and sea strikes by the U.S. and Britain on Houthi targets in Yemen after attacks on shipping by the Iran-backed group.Brent crude futures settled 88 cents, or 1.1%, higher at $78.29 a barrel. The session high was up over $3 to more than $80, its highest this year.U.S. West Texas Intermediate crude futures climbed 66 cents, or 0.9%, to $72.68, paring gains after touching a 2024 high of $75.25.While the diversions were expected to push up the cost and time it take to transport oil, supplies have not yet been impacted, analysts and industry experts noted, easing some of the earlier gains in prices.
The market volatility is attributed to fears the conflict will expand to include multiple Middle Eastern nations.
“The chance of dragging multiple oil producing countries into the conflict is definitely higher today than it was yesterday. And it was higher yesterday than the day before,” said Robert Yawger, vice president of energy futures at Mizuho Securities.Another concern is that oil facilities in Saudi Arabia could get hit by a retaliatory strike from the Houthis. In 2019, roughly 5% of world oil supply was briefly knocked offline in a large-scale drone attack on Saudi oil facilities.“Once you start hitting facilities on land in Yemen, that is taking things to the next level,” Yawger said.
Many Americans, already suffering from the effects of inflation, are concerned that price increases will also increase. One expert asserts that only small business entities will be immediately impacted by the rise in shipping costs due to the continuing action against the Houthi pirates.
While small businesses will likely bear higher import costs resulting from the jump in spot prices, large retailers like Walmart and Home Depot would not be significantly impacted because their shipping costs are dictated by previously established contracts, Miller said.The U.S. attack on Yemen could expand the number of ships diverting from the Suez Canal, since insurance companies will be reluctant to cover damage incurred by a possible attack, Christopher Tang, a professor at the UCLA Anderson School of Management, who focuses on supply chains, told ABC News.Oil tankers, especially, may want to avoid the risk of environmental disaster and worker injury, Tang added.”The risk is just too high,” Tang said.The crisis in the Red Sea is likely to have a marked effect on consumer prices in Europe but could also increase prices for a range of U.S. consumer products imported from countries in Southeast Asia, such as India and Vietnam, since those goods travel through the Suez Canal, some analysts said.
However, it must be noted that the recent numbers issued for the Consumer Price Index (CPI) rose at a higher-than-expected pace…and these numbers don’t include fuel costs.
Prices that consumers pay for a variety of goods and services rose more than expected in December, according to a Labor Department measure Thursday that shows inflation still holding a grip on the U.S. economy.The consumer price index increased 0.3% for the month, higher than the 0.2% estimate at a time when most economists and policymakers see inflationary pressures easing. On a 12-month basis, the CPI closed 2023 up 3.4%. Economists surveyed by Dow Jones had been looking for a year-over-year reading of 3.2%.
If “It’s the Economy, Stupid” is still an important part of this presidential election cycle, then it is little wonder that the Biden administration has been forced to act. However, it may be too little too late.
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