Israel’s missile strikes on the Yemeni port of Hodeidah will most probably sprinkle some of the lost geopolitical risk premium into flat prices. With a spiral of retaliation looking the be the only way forward, this would derail the flurry of diplomatic activity coming from US Secretary of State Blinken, seeking to achieve at least a temporary ceasefire in Gaza. Concurrently to the ongoing shipping disruptions in the Red Sea, new flash points might appear in the Eastern Mediterranean.

Safety of navigation has by now become the buzzword of the shipping markets. Not a single Indian diesel cargo went through the Suez Canal in June, even the occasional Urals cargo started to circumnavigate Africa (the most recent one sailing past South Africa at the time of writing) instead of relying exclusively on the riskier path through the Red Sea. The potential extension of maritime warfare into the Eastern Mediterranean could very well become the added layer of geopolitical risk that we have not yet seen, just as improving summer demand has steepened backwardation in all key futures contracts.

The M1-M3 time spread in ICE Brent futures contracts, $/bbl.

Source: ICE.

Backwardation isn’t the only market phenomenon that is back to October 2023 levels. Net length held by hedge funds and other money managers in WTI futures and options has risen to its highest in 10 months, to an equivalent of 263.5 MMbbls. What is particularly striking about this is that short positions held are back to being razor-thin, a mere 21 MMbbls overall, dwarfed by the fourteenfold larger long position tally. Whilst the bullish ride in WTI positioning continues, net length has notched up another 10 MMbbls in the week ending July 16, the fourth straight w/w increase, the market’s general interest in Brent has already started to taper off. The last week reported by CFTC saw a 16 MMbbls w/w decline, cutting short a five-week hot streak, though it needs to be said that the overall net length remained well below March-April levels all throughout June and July. The discrepancy in how WTI and Brent have rebounded from the debris of the OPEC+ decision is too striking not to notice – and whilst shrinking Cushing inventories might have also played the role, we tend to believe that expectations of a disruptive hurricane season were looming large for many investors.

Net length held by money managers in ICE Brent and Nymex WTI futures and options, lots.

Source: Kpler based on CFTC data.

What potential impact could the Hodeidah attack have on oil markets? Barring a one-off correction in Monday trading, it seems unlikely that prices could surge past $90/bbl, at least not with the current pace of Chinese buying. That doesn’t necessarily mean there will be no change to physical flows. In fact, for Israel’s oil imports the risks of seeing imports disrupted by missile or drone strikes are much higher now. Israeli refiners have seen overall crude imports drop to the lowest average since 2015 this year to date, coming in at a mere 214 kbd. Azeri BTC remains the largest stream of crude purchased by Israeli refiners, accounting for one third of all flows (70 kbd), with Kazakh CPC Blend coming in a close second at 67 kbd. Beyond BTC and CPC, the variability of Israel’s crude intake has been shrinking – since May, it was only Congolese and Gabonese grades (Rabi, Djeno, Lucina) that complemented the FSU-sourced baseload of Israeli refineries.

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