Oil prices initially jumped by over 3% in early Asian trade on Monday as fears of a major and extended supply disruption were stoked by continued attacks in the Middle East and the postponement of a crunch meeting between Gulf states and Iran.
At the time of writing, both benchmarks had fallen back slightly, with WTI futures trading at $102.2 per barrel, 2.16% higher on the day, and Brent futures up 2.14% at $106.8 per barrel.
Over the weekend, the Houthis claimed to have launched a large-scale missile and drone attack against Saudi Arabia, saying they had struck a military base in Sharurah. Saudi state media did not confirm that attack, but separately reported that a projectile fell in the Jazan region. The attack appears to be the latest escalation in the conflict between Saudi Arabia and Iranian proxies, following a drone attack on the East-West Pipeline that was launched from Iraq last week.
At the same time, the UKMTO released an alert saying a vessel within the Strait of Hormuz had been struck by an unknown projectile. The AP later reported that an Iranian cargo vessel had been struck early on Sunday off Qeshm Island, although it is unclear if this is the same attack.
Adding to the bullish sentiment in oil markets, Oman’s Foreign Minister, Badr Albusaidi, then announced that a Monday meeting between Gulf states and Iran had been postponed due to a lack of consensus. The meeting had been scheduled to discuss a potential deal between Iran and Oman over the temporary management of shipping through the Strait of Hormuz. It would have been the first time that top diplomats from the GCC had sat down as a group with their Iranian counterparts since the war began.
Even before the latest escalations, last week’s attacks on Saudi Arabia’s East-West Pipeline had already put oil markets on edge, with the Kingdom having to close one of the region's most important crude export routes. Traders are now concerned that up to 4% of global oil supply could be lost if that pipeline isn’t reopened within days. The scale of the damage remains unclear, with reports that multiple pumping stations were hit by drones launched from Iraq.
It isn’t just the East-West Pipeline that is threatening Saudi oil supply beyond the Strait of Hormuz, with the Houthis gaining territory within Yemen last week and increasing their control over the Bab el-Mandeb Strait. Critically, the group reached the strategically significant island of Perim last week, which would allow them to monitor and potentially mine the Red Sea waterway.
With diplomacy stumbling, attacks continuing, and plenty of uncertainty around just how much supply will be leaving the region in the coming weeks, things are looking increasingly bullish for oil markets. If Saudi Arabia is able to quickly restore throughput through the East-West Pipeline and the meeting between Gulf states and Iran is rescheduled, some pressure may be eased, but until traders get some visibility on that, prices are likely to climb.
By Josh Owens for Oilprice.com
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