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Middle East tensions fuel chances of oil price surge

U.S.-owned ship Genco Picardy came under attack from a bomb-carrying drone launched by Yemen's Houthi rebels in the Gulf of Aden, Thursday, Jan. 18, 2024.
U.S.-owned ship Genco Picardy came under attack from a bomb-carrying drone launched by Yemen's Houthi rebels in the Gulf of Aden, Thursday, Jan. 18, 2024. Copyright Indian Navy
Copyright Indian Navy
By Indrabati Lahiri
Published on Updated
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Following a drone attack on a US airbase in Jordan, the Middle Eastern conflict could get worse. US President Joe Biden says his country "will hold all those responsible to account at a time and in a manner of our choosing".

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A drone attack over the weekend on the Tower 22 US base on the Jordan-Syria border has killed three US troops and injured several others. The White House has blamed the attack on "radical Iran-backed militant groups" but has not yet said which group it believes to be responsible.

Following the attack, crude oil prices inched up 0.27% to $78.2 (€72.2) on Monday morning, with a weekly rise of 4.73%. Brent crude oil prices were up 0.05% to $82.9 on Monday, seeing a weekly gain of 3.70%.

President Biden on Sunday announced in South Carolina that his country would "hold all those responsible to account. At a time and, in a manner of our choosing, we shall respond".

Increased attacks on US bases since Israel-Hamas war

The attacks come at a time when the Middle East is already on high alert due to the ongoing Israel-Hamas war and the Red Sea conflict. Iran-backed Yemeni Houthi rebels have targeted commercial ships from more than 40 countries travelling through the Red Sea and Suez Canal, saying the attacks are in response to Israel's actions in Gaza.

Although US bases in both Syria and Iraq have seen increased attacks since the start of the Israel-Hamas war last October, this is the first time that US personnel have been killed. 

Iran has denied any involvement in the drone attack. Iran's foreign ministry spokesman Nasser Kanaani was quoted by the BBC as telling Iran's official news agency IRNA: "These claims are made with specific political goals to reverse the realities of the region."

However, with the US seeming likely to retaliate with its own strikes, the geopolitical situation in the Middle East could very well deteriorate further - some 10 countries have already been drawn into the situation in recent months. If the US does retaliate, such action is likely to impact oil and energy prices the most.

How could this conflict escalation impact oil prices?

ING estimates that about 12% of global seaborne oil travels through the Red Sea, along with considerable amounts of refined products. According to the American Journal of Transportation, about 15.5 million tonnes of liquefied natural gas (LNG) also went through the route in 2023.

Several shipping companies such as Maersk and Hapag-Lloyd have already paused transits through the disrupted region and further action could potentially lead to oil and LNG supplies for several parts of the world becoming disrupted in the coming months. Energy prices would be likely to rise.  

It may not only be oil and energy prices that are affected. Several UK and European retail chains such as Tesco, Primark, IKEA and Next have warned the disruptions may lead to delays in availability for some products and a rise in costs for others. 

The increase in costs for both energy and other products could also spark a rise in inflation for a number of countries, leading to central banks delaying a cut in interest rates.

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