Oil prices rose on Monday as the Middle East region faced escalating tensions and violence, while supply disruptions in Libya and Russia added to the market tightness. Brent crude futures, the global benchmark, climbed 0.4 per cent to $83.84 a barrel, while U.S. West Texas Intermediate (WTI) crude futures gained 0.4 per cent to $78.35 a barrel.
The oil market was rattled by a drone attack on U.S. forces in Jordan, which killed three U.S. service members and wounded several others. The attack was claimed by a group calling itself the Islamic State of Iraq and the Levant (ISIL), which said it was targeting the “crusader coalition” in the region.
The attack raised concerns of a wider conflict in the oil-rich Middle East, where the U.S. and its allies have been involved in various military operations and diplomatic efforts to counter the threats posed by ISIL, Iran, and other actors. Analysts said the attack could mark a critical inflection point in the ongoing conflict and raise the specter of a more substantial U.S. involvement in the war.
“We believe the death of three U.S. service members today in Jordan marks a critical inflection point in the ongoing conflict in the Middle East and raises a specter of a more substantial U.S. involvement in the war,” RBC Capital analyst Helima Croft said in a note, adding that a more direct confrontation with Iran raises the specter of regional energy supply disruptions.
Houthi rebels target oil tankers in the Red Sea
The oil market was also on edge after the Houthi rebels in Yemen, who are backed by Iran, stepped up their attacks on oil tankers in the Red Sea, a vital waterway for global oil trade. On Friday, the rebels hit a tanker operated by Trafigura, one of the world’s largest commodities traders, with a missile, causing a fire on board. The fire was later put out and no injuries were reported.
The attack was the latest in a series of incidents involving oil tankers in the Red Sea, which have raised fears of a potential closure of the Bab el-Mandeb Strait, a narrow chokepoint that connects the Red Sea to the Gulf of Aden and the Indian Ocean. About 4.8 million barrels per day of crude oil and refined products passed through the strait in 2019, according to the U.S. Energy Information Administration (EIA).
“With oil tankers linked to the U.S. and UK now under threat of attack, the market is likely to reprice the risk of disruptions,” ANZ analysts said in a note.
Libyan oilfield shut down amid protests
The oil market also faced supply disruptions in Libya, where the Sharara oilfield, the country’s largest, was shut down on Sunday due to protests by local residents. The oilfield, which has a capacity of 300,000 barrels per day (bpd), has been a frequent target for local and broader political protests, as well as attacks by armed groups.
The closure of the Sharara oilfield reduced Libya’s oil production by about a third, according to the National Oil Corporation (NOC), which declared force majeure on crude exports from the field. Force majeure is a legal clause that allows companies to suspend contractual obligations due to circumstances beyond their control.
Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC), has been struggling to restore its oil industry after a decade of civil war and political turmoil. The country’s oil production averaged 1.2 million bpd in 2021, up from 0.4 million bpd in 2020, according to the EIA.
Russian oil exports fall after drone attacks on refineries
The oil market also saw a decline in Russian oil exports, after several refineries in the country were damaged by drone attacks in December. The attacks, which were blamed on unidentified militants, disrupted the operations of refineries on the Baltic and Black Seas, which account for about a third of Russia’s total refining capacity.
According to traders and LSEG ship-tracking data, Russia will likely cut exports of naphtha, a petrochemical feedstock, by some 127,500 – 136,000 bpd, or around a third of its total exports, in January. The reduction in naphtha exports could tighten the global market for the product, which is used to make plastics, synthetic fibers, and gasoline.
Russia is part of the OPEC+ group of oil producers, which has agreed to cut production by around 2.2 million bpd to support the oil market amid the COVID-19 pandemic. The group, which includes OPEC members and other major producers such as Russia, Kazakhstan, and Mexico, plans to gradually increase its output by 400,000 bpd each month until the end of 2022.
