According to RBC Capital Markets, oil traders are not taking the escalating situation in the Middle East seriously enough. The firm identifies several key flashpoints that could lead to a wider regional conflict with a significant impact on oil, including the Red Sea, Lebanon, and Iraq. Despite renewed attacks by Houthi militants in the Red Sea, crude oil prices fell on Tuesday. The Danish shipping giant Maersk has paused all shipping through the crucial trade chokepoint due to the deteriorating security situation. US crude and the global benchmark rose more than 2% on Wednesday as disruption to an oilfield in Libya added to supply concerns from Red Sea tensions.
RBC analyst Helima Croft sees growing indications that the US and the UK are preparing for a more large-scale military operation against the Houthis in Yemen, who are backed by Iran. There are tensions between Israel and Lebanon as Hezbollah fires rockets across the southern border. And Iran-backed militias attacked a US base in Iraq last week, prompting President Joe Biden to launch airstrikes on their sites.
Despite these developments, Croft points out that crude oil prices are not yet reflecting the seriousness of the situation in the region. She also highlights the importance of the Red Sea and the Strait of Hormuz for global energy supplies, emphasizing the potential impact of Iranian involvement in the conflict. “The market is basically saying ‘we will wait and see until something happens,'” Croft said. “But it is really getting much more serious every day.”
The situation in the Middle East remains “extremely precarious” and has the potential to spiral into a wider regional conflict, as tensions continue to escalate. The key question is whether Iran will directly intervene in the conflicts or cause problems through proxies, such as the Houthis and Hezbollah. Oil traders and investors are now questioning how current tensions in the Middle East are different from past crises in the region, and whether there is any appetite in the Biden administration for a war in the Middle East with the presidential election rapidly approaching.
The escalating situation in the Middle East poses a significant risk to oil supplies and shipping, particularly through the Red Sea and the Strait of Hormuz. The potential for a wider regional conflict presents a clear threat to global energy supplies, and the situation in Lebanon and Iraq further adds to the complexity and volatility of the region.