The Red Sea region has historically been a hot spot for geopolitical tensions that have the potential to disrupt global oil supply routes. So why haven’t we seen oil prices surge higher in recent weeks?
Well, it’s more complicated than the headlines would have you believe. Oil disruptions in the short term won’t matter much if manufacturing continues to slow down in the intermediate term.
Why the Red Sea Turmoil Should Raise Oil Prices
Let’s lay out the argument for why oil prices could still spike on geopolitical risks, with the Red Sea dynamic at the forefront:
- Disruption of Supply: Conflict in key oil-producing regions can lead to the disruption of supply, which reduces the amount of oil on the global market.
- Transportation Risks: Tensions can also threaten important shipping routes, such as the Suez Canal, which is a critical chokepoint for oil transportation from the Middle East to Europe and North America.
- Market Speculation: Investors often react to potential risks by speculating on future oil prices, which can lead to price spikes.
What’s happening with Yemen is a legitimate concern, as it creates issues around the safety of sea lanes due to the proximity of key shipping routes to conflict zones. Political tensions between regional powers have also been a source of unease, with potential for escalation affecting oil production and transport.
… And Why Crude Has Remained Stagnant in 2024
All this is bullish for oil, yet despite these factors, the anticipated spike in oil prices has not materialized. That’s because on the other side of the equation are countering forces that have kept oil prices in check:
- Weak Manufacturing Sector: A slowdown in global manufacturing has led to lower demand for oil. Manufacturing is energy-intensive, and a dip in this sector’s activity usually translates to less demand for oil, which in turn can keep prices down.
- Global Energy Demand Concerns: Broader economic concerns, such as the possibility of a recession, have dampened energy demand forecasts. The move toward renewable energy sources and increased energy efficiency are also contributing factors to this trend.
The manufacturing sector is often cyclical, with periods of growth followed by slowdowns. Current weakness could be due to a variety of factors, such as trade disputes, supply chain disruptions, or shifts in economic policy. As these issues are addressed, the sector could rebound, potentially leading to increased oil demand and higher prices.
However, the shift in global energy demand could represent a more sustained change. The transition toward renewable energy is gaining momentum, driven by environmental concerns and policy initiatives aimed at reducing carbon emissions. Additionally, improvements in energy efficiency across industries and the proliferation of electric vehicles are changing the landscape of energy consumption.
The Bottom Line
The current state of the oil market reflects a delicate balance between immediate geopolitical risks and broader trends in global energy demand. While events around the Red Sea have not yet triggered a dramatic increase in oil prices, they underscore the market’s volatility and sensitivity to regional instability. At the same time, the weak manufacturing sector and concerns over long-term energy demand are exerting downward pressure on prices, suggesting a more complex dynamic at work.
How this ultimately plays out is anybody’s guess, but one thing is for certain. Oil’s movement is in a tug of war right now independent of what any single chart says.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
