Houthi attacks have intensified recently, with more incidents targeting ships in the first half of June compared to the entire month of May. So far, there have been fourteen incidents involving different ships in June alone. Concurrently, Israel has bombed southern Lebanon, heightening tensions with Hezbollah just days before Iran’s presidential elections. This resurgence in geopolitical tensions, coupled with a tighter physical market, has the potential to further boost oil prices.

Despite the increase in Houthi attacks, the number remains lower than at the onset in November, weeks after the Israel-Hamas war began. Recently, the attacks have primarily targeted container ships or dry bulk carriers rather than liquid tankers. However, two new factors have increased their unpredictability and the risks associated with moving oil through the Red Sea.

First, the lethality of the attacks has evolved, with Houthis using more advanced weapons such as unmanned surface vehicles (USVs). Second, the attacks are no longer limited to Western ships. Some targeted cargoes were destined for Iran or originated from Russia, indicating that the Houthis operate independently rather than merely as proxies for Iran. The Yemeni rebel group said they will attack any ship owned by a company that has ships going to Israeli ports.

Examples include the Seaguardian, carrying milling wheat from Russia to Saudi Arabia, which was targeted by missiles on June 13. Similarly, the Laax was attacked with five missiles on May 28 while en route to Iran’s Bandar Khomeini port with soybeans from Brazil. Earlier, on February 11, the Star Iris, carrying Brazilian corn to Iran, was also targeted.

Number of Houthi attacks on ships of all types, count

Source: The Washington Institute for Near East Policy. Only confirmed attacks are included. The June data is up to June 20.

The resurgence in Houthi attacks comes at a time when market sentiment has recently hit lows. Hedge fund and CTA positioning have become very bearish, particularly on Brent. Since mid-April, hedge funds and other money managers have sold the equivalent of 263 million barrels of Brent. However, the market may be turning around, with positive net positioning in the past week and rebounding flat prices as expected.

Heightened tensions could further support flat prices, especially as the physical market is tightening just ahead of summer. The Dated-to-Frontline spread has widened to $0.74 per barrel, up from $0.09/bbl two weeks ago, marking the highest spread since late April. We expect global crude demand (runs and direct crude use) to increase by 1.7 Mbd in June m/m and by another 1.07 Mbd in July compared to June. This combination of increased demand and heightened geopolitical tensions could push Brent’s front-month price closer to $90/bbl.

Skirmishes and tit-for-tat attacks between Israel and Hezbollah have intensified lately, resulting in the death of a high-level Hezbollah official and the launch of dozens of missiles on Israeli soil from southern Lebanon. While these incidents are unlikely to lead to a wider conflict, as neither party can currently afford it, they contribute to the slightly more bullish narrative in oil prices, even though the Biden administration could resort to more draws from SPRs and therefore limit any significant price upside.

Hezbollah’s main backer, Iran, is holding presidential elections on June 28 following the death of President Raisi in a helicopter crash. The main focus will be on voter turnout. This internal agenda makes it an opportune time for Israel to ramp up pressure on Hezbollah, which the Netanyahu cabinet appears to be doing.

Regarding oil trading, volumes transiting via the Red Sea continue to average around 2.8 Mbd ytd, with the majority consisting of Russian crude heading north to south towards Asian markets. These levels have stabilized to a new normal, with nearly all Russian crude flowing via the Suez Canal, except for five cargoes between March and April.

Bab el Mandeb strait crude transit, kbd

Source: Kpler

Flows from the Middle East continue to show a dichotomy. Saudi oil manages to take the short route via the Suez Canal or the SUMED pipeline, but none of these shipments have originated from the kingdom’s east coast, except for one cargo in February. All other volumes have taken the short route via Saudi’s East-West Petroline.

In contrast, the volumes of Basrah crude from Iraq being shipped to Europe via the Suez Canal or the SUMED pipeline have decreased significantly, now just a quarter of what they were in 2023. The fact that Basrah cargoes are traded on a FOB basis further shows how wary charterers and buyers have been about taking the short route. The recent uptick in Houthi attacks is only likely to accentuate such caution.

Middle Eastern crude shipped to the SUMED pipeline or to Europe via the Suez Canal, kbd

Source: Kpler

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