Oil Up After U.S. Retaliates Against Houthi; But Fundamentals Remain Steady

Meanwhile, Washington replenishes the SPR at a snail's pace

Retaliation for Red Sea strikes against merchant vessels meant more price increases in oil on Friday, although global supplies overall have not been affected.

Brent settled up 88 cents at $78.29 per barrel, and West Texas Intermediate settled up 66 cents at $72.68 per barrel.

Stena Bulk, Hafnia, and Torm stated they were halting all ships heading towards the Red Sea after Iran-backed Houthi militants launched yet more drone attacks – and the U.S. and Britain in turn launched air and sea strikes against the Houthi in Yemen.

The Combined Maritime Forces, a multinational coalition led by the U.S., advised ships to avoid transiting the Bab el-Mandeb Strait for "several days," according to a statement from the International Association of Independent Tanker Owners.

Despite geopolitical tensions, Matt Stephani, president at Cavanal Hill Investment Management, said, "Although the lack of shipping through the Red Sea... does create transportation issues for some crude supplies, the impact on the physical oil markets is, thus far, minimal."

Focused more on sentiment, Dan Ghali, a commodity strategist at TD Securities, said, "Energy markets have been significantly underpriced for the ongoing rise in geopolitical risks," and he added  that if Brent breaks $81 per barrel, it could drive buying and "force algos to start acquiring net long positions."

In other oil news on Friday, Washington announced a request for proposal for another 3 million barrels of crude to refill the U.S.'s Strategic Petroleum Reserve, which started out with 638.1 million barrels in storage but was reduced last spring to 371.6 million barrels.

OilPrice.com estimated that given replenishment rates, "it would take years to get the SPR back up to 2021 levels; it would also cost $21 billion at $70 per barrel."

Also on Friday, Citi revealed in a note that it had cut its expectations for Brent prices this year by $1 (compared to its previous forecast) to an average of $74 per barrel, due to worries about excess supply.

Citi analysts wrote, "We believe softer market fundamentals, absent major supply disruptions, will result in OPEC+ rolling over its Q1 2024 production cuts throughout the whole 2024 and start tapering them only in H2 2025."