Houthi Attacks Propel Oil Prices to Five-Month Peak Amid Supply and Inflation Concerns

Oil prices surged to a five-month high on Tuesday, driven by continued attacks by Yemen's Iran-backed Houthis on Saudi Arabia. This escalation has intensified fears of supply disruptions and potential inflation spikes, which could lead to further interest rate hikes.

Brent crude, the global benchmark for two-thirds of the world's oil, saw a 1.52 per cent increase, trading at $111.30 per barrel by 2.27 pm UAE time. West Texas Intermediate (WTI), the US crude gauge, climbed 2.30 per cent to $100.80 a barrel. These price levels were last observed in mid-May, with Brent hitting $110 and WTI surpassing $100 for the first time in a month on Friday.

The Houthis claimed responsibility for further strikes on Saudi energy, airport, and military targets on Monday, heightening regional tensions and causing stock markets in the Gulf to decline. Previously, the rebels had reported conducting six attacks within the kingdom, including strikes on King Khalid International Airport in Riyadh, a military airbase near Abha International Airport, and a naval task-force camp and Saudi radar in Bir Askar.

Amidst the ongoing US-Iran conflict, crude supplies from the Middle East remain constrained. In response, the International Energy Agency (IEA) announced last week an agreement to release over 20 million barrels of diesel into the market to address a surge in diesel prices.

Gulf oil producers have been rerouting tanker transfers as far as India's coast and offering reduced prices to maintain crude flow to Asia. This comes as the makeshift export network around the Strait of Hormuz faces congestion and persistent attacks.

These conflicts have kept energy prices elevated, contributing to rising inflation. This, in turn, increases the likelihood of another interest rate hike from the US Federal Reserve, which is scheduled to convene next week. Analysts anticipate a second consecutive increase as Fed officials aim to curb inflation.

Analysts at US energy company Duncan Oil noted, "Brent crude hovering near five-month highs following geopolitical tensions in the Middle East has reignited fears of sticky inflation." They added, "Surging energy costs have led investors to believe the Fed will keep interest rates higher for longer to tame inflation."

Movement through the Strait of Hormuz, which historically handled a fifth of the world's energy exports, continues to be under pressure. However, US Energy Secretary Chris Wright stated on Monday that the US is prepared to allow oil tankers under sanctions to begin a legitimate process for shipping crude.

Analytics firm Kpler indicated that easing sanctions on the 'shadow fleet' would have a minimal impact on record freight rates. Kpler estimated that as of Monday, only 24 out of approximately 160 vessels sanctioned by the Treasury Department's Office of Foreign Assets Control could re-enter mainstream trade, considering their age and ownership restrictions.

Meanwhile, wholesale diesel prices have surpassed $200 per gallon in Singapore and reached approximately $220 in Europe and the US, according to the IEA.