By Al-Fassel | 2023-12-21

Oil prices have been steadily climbing following attacks on vessels in the Red Sea by Yemen's Iran-backed Houthis.

Brent crude, the international standard, gained 1.1% on Wednesday (December 20) to move back above $80 a barrel for the first time since December 1, financial news website Benzinga reported.

West Texas Intermediate, the US benchmark, was up 1.5% at $75.06 a barrel. It has also risen 5% over the past three trading sessions and is up 9.4% over the past week.

The European benchmark oil futures contract has now risen nearly 5% in the past three days and is up 8.8% in the past week.

The increase in oil prices was fueled by BP and other companies suspending transit through the Red Sea owing to attacks on cargo ships from areas in Yemen controlled by the Houthis.

In a separate development pushing prices higher, Russia said on December 17 that it may reduce crude output this month by an additional 50,000 barrels a day or more.

European Union (EU) leaders on December 14 agreed to impose a 12th round of sanctions on Russia over the war on Ukraine, targeting diamond exports and better enforcing an oil price cap.

Previous EU sanctions place a price cap of $60 a barrel on Russian crude.

Russia has been able to sidestep that measure by building a "dark fleet" of oil tankers, and also with the help of China and India, a researcher at the Carnegie Russia Eurasia Center, Alexandra Prokopenko, recently revealed.

The EU countries on December 18 agreed a "strengthened information sharing mechanism" for tankers designed to identify ships involved in practices such as ship-to-ship oil transfers at sea, the European Council statement said.

In recent weeks, the Houthis have launched numerous drone and missile attacks on ships passing through the Red Sea's strategic Bab al-Mandeb strait.

Ships must navigate the narrow passage at the southern tip of the Red Sea when traveling to or from the Suez Canal at the northern end.

Ships must travel through the Red Sea to use the Suez Canal, a key transit route for cargo and oil. Around 20,000 ships pass through the Suez Canal each year.

The Red Sea is a key route linking the Indian Ocean to the Mediterranean Sea.

According to the International Chamber of Shipping, a London-based trade association for shipping firms, 12% of global trade passes through the Red Sea.

Significant additional costs

Five major shipping firms, including three of the world's largest, have said they are rerouting their vessels away from the Red Sea.

On December 18, British oil giant BP and Taiwan's Evergreen became the latest to suspend transit.

MSC, Maersk, CMA CGM, Hapag-Lloyd and Evergreen had previously announced the suspension.

The move is likely to disrupt global trade by increasing delays and increasing costs, AFP reported.

Cosco, the world's fourth-largest shipping firm, has yet to announce its plans.

If ships do not pass through the Red Sea and Suez Canal, they need to travel around Africa, which adds considerable time and expense to journeys.

"It might be a six-day-longer journey for the average ship or vessel that will come from Asia going to Europe, and it might cost $300,000-400,000 extra in terms of fuel costs," said Andreas Krieg, a professor at King's College London.

Traveling around Africa could "cause a small increase in the price of goods," said Paul Tourret, head of ISEMAR, a French maritime commerce institute.

The impact would be felt in several months' time, he said.

"If attacks in the region persist as a long-term issue, the additional expenses incurred from either taking longer alternative routes or the heightened insurance fees for continuing to use the Red Sea route are expected to contribute to an increase in oil prices," Benzinga reported.

"Given the importance of the Red Sea and Suez Canal as a crucial transit point for both crude oil and natural gas, these suspensions mean that cargoes face a lengthy diversion around the Horn of Africa, which will add significant costs to company supply chains, as well as having significant inflationary impacts," said market analyst Michael Hewson at CMC Markets.

The delay in shipping also could disrupt supply chains.

Egypt will suffer as well, as fees paid by ships using the Suez Canal are a key source of foreign currency earnings.

"Amid an ongoing currency crisis and high inflation, a drop in vital revenue from the Suez Canal would come at a bad time," Torbjorn Soltvedt of risk intelligence firm Verisk Maplecroft told AFP.