The Commodities Feed: Tension builds in the Middle East | Article

Tension in the Middle East continues to grow. This week has seen Houthi attacks in the Red Sea intensify, and the US and UK have reportedly responded overnight by carrying out airstrikes against the Houthis in Yemen. Adding to the tension is the fact that Iran has also seized an oil tanker in the Gulf of Oman. This will be a worry for oil markets if we see incidents like this becoming more regular. The Gulf of Oman is very near the Strait of Hormuz, a critical chokepoint for oil flows. More than 20m b/d of oil moves through the Strait of Hormuz, which is equivalent to around 20% of global consumption. So clearly, more significant disruptions to oil flows in this region will be much more alarming for markets. And unlike the Red Sea, where vessels can divert and take a longer route around Southern Africa, there is little other alternative for ships going through the Strait of Hormuz. The Saudis and the UAE have pipelines with a combined capacity of around 6.5m b/d, which avoids the Strait of Hormuz, but the rest of the oil flows would be at risk. For now, we believe the risk of significant disruption to oil flows from the Persian Gulf is low, but it is certainly worth keeping an eye on, given the potential impact it could have on oil supply and prices.

While oil prices were fairly well supported yesterday, the move was fairly modest given these developments. ICE Brent settled just 0.79% higher on the day. Possibly, the higher-than-expected US CPI print could have held oil back as it suggests that maybe we will not see the Fed cutting rates as soon as many in the market expect.

The latest data from Insights Global shows that refined product inventories in the ARA region increased by 224kt over the last week to 5.29mt. The increase was predominantly driven by gasoil stocks, which rose by 176kt to 1.96mt. However, gasoil stocks in the region still remain well below the 5-year average for this time of year. Elsewhere, data from Singapore show that oil product stocks fell by 262k barrels to 42.4m barrels.

The European gas market was fairly rangebound yesterday. The TTF front-month contract traded between EUR30-31/MWh. This is despite the ongoing tension in the Middle East. Colder weather across parts of Europe has seen gas storage drawing at a quicker pace in recent days with storage now a little less than 82% full, still well above the 5-year average of around 70% for this time of year. Our balance still assumes that we finish the current heating season with storage over 50% full, which suggests limited upside to prices.

Henry Hub rallied by a little over 1.9% higher yesterday and the market has continued to strengthen in early trading on Friday. US natural gas storage fell by 140bcf over the last week, which was more than the roughly 122bcf draw the market was expecting, and also significantly more than the 5-year average draw of 89bcf. Total gas storage now stands at 3,336bcf, 11.6% above the 5-year average.

On the energy calendar for today. Other than the usual rig count data for the US from Baker Hughes and the Commitment of Traders report, China will also publish its first batch of trade data for December, which will include oil and gas imports.

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