Oil Prices Experience Minor Decline as Investors Monitor Middle East Developments

Oil prices saw a slight dip on Monday as market participants kept a close eye on potential supply disruptions in the Middle East. The concerns arose following strikes by U.S. and British forces aiming to prevent Houthi militia attacks on ships in the Red Sea.

Brent crude futures declined by 31 cents, or 0.4%, reaching $77.98 a barrel by 0124 GMT, following a 1.1% increase on Friday. Similarly, U.S. West Texas Intermediate crude dropped to $72.36 a barrel, down 32 cents, or 0.4%, after experiencing nearly a 1% gain in the previous session.

Last week, the benchmarks recorded a more than 2% surge, reaching their highest intraday levels this year. This increase came in response to air strikes launched by U.S. and British forces against Houthi forces. The strikes were retaliation for months of attacks on Red Sea shipping, which the Iran-backed fighters claimed were in response to the conflict in Gaza.

Amid escalating tensions, the Houthi militia threatened a “strong and effective response” following another U.S. strike overnight. The United States later reported shooting down a missile fired from Houthi militant areas in Yemen.

President Joe Biden disclosed that the United States had conveyed a private message to Iran regarding the Houthi attacks. The recent strikes led to some tanker owners avoiding the Red Sea, and several tankers altered their course on Friday. However, traders remain vigilant about potential responses from Iran and their impact on shipments in the Strait of Hormuz, a critical oil chokepoint.

While the Middle East conflict has not yet affected oil production, analysts suggest that the geopolitical risk premium in oil prices appears relatively modest. Goldman Sachs analysts noted that the implied volatility of options indicates a limited risk premium. They emphasized that, although unlikely, a significant disruption in the Strait of Hormuz could lead to a 20% rise in oil prices in the first month, potentially doubling in an extended disruption scenario.

In Libya, ongoing protests against perceived corruption have threatened to shut down two additional oil and gas facilities, following the closure of the 300,000 barrel-per-day Sharara field on January 7. Meanwhile, in the U.S., power and natural gas companies prepared for extreme cold over the Martin Luther King Day holiday weekend, anticipating record gas demand coupled with reduced supplies due to freezing wells.

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