Oil prices surged after the US military targeted Iran-backed Houthi fighters in Yemen, in response to attacks on merchant ships in the Red Sea. Nonetheless, a worsening economic forecast is predicted to keep oil prices under pressure.
ADVERTISEMENTOil costs moved to their highest levels since March 4 following US strikes on Yemen’s Houthi group, which were launched from the Red Sea over the weekend.
During the early Asian session, the NYNEXfutures of West Texas Intermediate (WTI) rose by as much as 1.5% to $68.19 per barrel, while the ICEfutures of Brent jumped 1.42% to $71.58 per barrel before falling back. The natural gas futures price also increased by nearly 1% to $4.14 per million British thermal units (MMBtu) during the same period.
Additionally, China announced a special plan to boost domestic consumption, along with several positive economic data, which added to the optimism about demand. Retail sales in China rose 4% in the first two months of this year, accelerating from a 3.7% increase in December.
Houthi resumes attacks in the Red Sea
The Red Sea and the Suez Canal are essential routes for oil and gas shipments between Europe, Asia, and North America. In late 2023, the Iran-backed Houthi group, designated as a Foreign Terrorist Organisation by the United States, launched attacks on commercial vessels in the Red Sea in reaction to Israel’s retaliation against Hamas in Gaza. The Red Sea instability previously led to a rise in energy shipping costs as oil and gas cargo shipments had to take longer routes. Last week, the group stated that it will resume attacks following the six-week ceasefire in Gaza as Israel ceased all humanitarian aid.
On Saturday, US President Donald Trump ordered military strikes on Houthi militia sites in Yemen in response to disruptions in shipping routes. He posted on the Truth Social that attacks on American vessels will not be tolerated. According to Pentagon chief Pete Hegseth, the US military strikes will be “aggressive” until Houthis stops military attacks, during an interview on Fox News.
Crude prices recover from multi-year lows
Earlier this month, crude prices reached their lowest level since November 2021 due to bleak economic outlooks amid escalating global trade conflicts. The ceasefire talks aimed at ending the conflict in Ukraine have also raised concerns about Russia’s production returning.
In February, China imposed 10% levies on crude oil and 15% on liquidsied natural gas (LNG) from the US in response to Trump’s tariffs. Last week, Trump proceeded with a 10% tariff on Canadian oil. Meanwhile, the OPEC+ decided to gradually raise its production by 138,000 barrels per day in April. These factors contributed to a plunge in crude prices, with both benchmarks experiencing sharp declines—Brent down 16% and WTI down 18% since mid-January.
Last week, crude prices rebounded from their respective multi-year lows on the news that the US will tighten sanctions on Iran. Iran accounts for 24% of the Middle East’s oil reserves and 12% of global reserves, according to the EIA. Its oil exports have increased since 2022, following Russia’s invasion of Ukraine, with the present supply reaching 1.5 million barrels per day, or 1.4% of global production.
Additionally, Russian President Vladimir Putin demands changes to the US ceasefire deal, also reducing hopes for an immediate truce in the Ukraine war. A weakened US dollar and a potential oversold technical signal may have also supported the rebound.
However, analysts expect the rebound in oil prices to be capped by economic concerns. “Lingering uncertainty over U.S. trade policy and mounting concerns about the economic outlook are capping risk appetite, limiting oil’s upside,” said Dilin Wu, a research analyst at Pepperstone.
Oil supply to exceed demand in 2025
However, the International Energy Agency warned last week that global oil supply could exceed demand by approximately 600,000 barrels per day in 2025, due to record production in the US and weakened demand amid rising global trade tensions, despite growing demand in China.
US inventory data demonstrated weekly stockpiles increased for six out of seven weeks since mid-January. Crude inventories rose by 1.45 million barrels in the week ending 7 March, following a 3.6 million build in the previous week. The US crude oil field production stabilized at a near-record high of 13.58 million barrels per day in early March.
