Phil Flynn
Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Operation Prosperity Guardian. The Energy Report 12/19/2023
The Iranian-backed Houthi rebels are playing a dangerous game that could draw the world closer to war. Oil prices popped after BP Plc said it would pause all shipments through the Red Sea and the key Bab-el-Mandeb strait blocking access to the Suez Canal. That route accounts for 12% of global seaborne trade and BP, along with other carriers, avoiding the route is already adding to the cost of oil leading to routes that take weeks longer adding to delays and increased costs for other goods as well.
Giovanni Staunovo pointed out that Russia’s war in Ukraine revived the Red Sea as a vital oil route. Oil shipments were rerouted through the Red Sea and oil traffic by 140% because of the war. India and Europe depend on that route and that is why we saw a big spike not only in oil prices but a massive spike in natural gas prices in Europe. It is very interesting that according to Tanker Trackers tankers carrying Iranian oil never get stopped or harassed. It is a clear sign that Iran is behind the harassment of world trade which can be construed as an act of war. If you want to move oil safely through the Red Sea, just put an Iranian flag on your tanker.
Because this is a growing risk to the global economy the US is forming a coalition to stand up to these Iranian-backed pirates. It’s called “Operation Prosperity Guardian”. Air and Space Forces Magazine writes that, “The U.S. is establishing a multinational maritime task force—Operation Prosperity Guardian—to address attacks from Houthis in Yemen on commercial ships and other targets as the conflict in the Middle East widens and risks upending global trade, Secretary of Defense Lloyd J. Austin III announced Dec. 18. The Pentagon said on Dec. 19 that the Houthis have conducted over 100 drone and ballistic missile attacks, targeting 10 merchant vessels involving more than 35 different nations. “The recent escalation in reckless Houthi attacks originating from Yemen threatens the free flow of commerce, endangers innocent mariners, and violates international law,” Austin said in a statement Oct. 18 issued while he was on a trip to the Middle East.
“Operation Prosperity Guardian is bringing together multiple countries including the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain, to jointly address security challenges in the southern Red Sea and the Gulf of Aden, to ensure freedom of navigation for all countries and bolster regional security and prosperity.” Hopefully, this show of force will allow the Red Sea to open up and bring the shippers back, but it may take some convincing. The Houthi rebels are not convinced. A Houthi official told Al Jazeera, “We will be able to confront any possible coalition that could be formed by the US in the Red Sea.”
Currently, according to Bloomberg News, there have been 67 container ships that have been diverted around the Cape of Good Hope and a further 75 that are delayed awaiting instructions on how to proceed. There are 15 merchant ships have come under attack since the war in Gaza began in October.
The risk to global supplies comes at a time when we are seeing mixed signs about U.S. oil production and the border crises at the southern border. US border officials have shut North American railroads crossings at Eagle Pass and El Paso, TX where we’re shut in an effort to curtail migrant crossings that could slow the delivery of commodities including crude oil, metals and agriculture according to Argus media.
Overnight there were reports of a “Massive explosion reportedly at Iran’s aviation and space force. These headquarters supply missiles and UAVs to regime proxies in the region.
Activity for oil prices is somewhat subdued as U.S. oil production continues to be high, creating a buffer against global disruptions of supply. Still there are signs that the US energy producer is getting ready to pull back as they keep an eye on the bottom line. There’s also some talk that the ability of the US oil producer to squeeze more blood out of the turnip is becoming somewhat more difficult and that could lead to an eventual peak on US soil production. In the meantime the focus is going to be on oil inventories. Warm temperatures are taking a little bit of the heat off of the diesel market even as parts of China are well below average. The focus here in the US for oil prices is going to be whether or not demand for oil continues to stay strong. Our expectations are demand is going to remain solid and that’s going to keep a floor under prices.
If you look at the crack spreads yesterday they absolutely went ballistic. That’s a sign that the demand for products is going to be strong. We believe it’s still the calm before this coming storm when it comes to the oil market so make sure that you’re hedged.
Natural gas prices continue to be conflicted about the future weather forecast. The debate continues to be from different weather forecasters. Some see a shift to sharply colder weather while others see an extremely mild winter. In the meantime it appears those betting on a mild winter are winning out in the short term. If we don’t see winter develop pretty soon, then the US is going to face a massive supply glut that could put many small operators out of business.
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