Brent hits $111.75, highest since May, after Houthi attacks

Brent crude climbed on Tuesday, October 20, to $111.75 a barrel (about 99.5 euros at today’s rate of 1.12258 dollars to the euro), the highest level since May, Reuters reports. Traders are pricing in geopolitical risk after attacks by Yemen’s Houthis on Saudi infrastructure and reports of strikes on ships in the Gulf.

Reuters notes that Brent traded at $111.20 at one point, up $1.65 or 1.5 percent from the previous close, which works out to a prior close of about $109.55. The National puts Brent at $111.30, up 1.52 percent. The same outlet recalls that Brent touched $110 on Friday for the first time since May, and that US WTI crossed $100 that day for the first time in a month. Our earlier report had Brent at $109.86, then the highest since May 19, so today’s peak is $1.89 above that level.

What did the Houthis attack, and what is confirmed?

The Houthis, a Yemeni group aligned with Iran, claimed responsibility on Monday for several attacks on Saudi energy, aviation and military targets. Reuters lists an Aramco site in Yanbu, the Shaybah oil field, and the King Khalid airport in Riyadh and the airport in Abha. The National writes of six attacks, including a military base near Abha airport, a naval unit’s camp and a radar in Bir Askar. Saudi authorities did not immediately confirm the claims, and Reuters could not verify them independently.

Kpler, a ship-tracking firm, said in a note on Monday that at least 18 vessels have been reported attacked in two weeks, which keeps the risk premium in place. Reuters adds that a Houthi attack on a government security forces training camp in Yemen’s Shabwa province killed 58 people on Monday and wounded more than 200.

The figures for the US benchmark differ between sources. Reuters says the November WTI contract, which expires on Tuesday, reached $110, the highest for the front-month contract since April, and traded at $109.08, up $5.42 or 5.2 percent. The National has WTI at $100.80, up 2.30 percent, but does not say which contract that refers to.

Analysts at the bank ING wrote in a note to clients on Tuesday (our translation):

“Oil prices continue to enjoy solid support … This suggests the market is pricing in a significant risk premium, given the instability of the situation. But if flows continue unimpeded despite the geopolitical backdrop, the risk premium would likely melt away slowly. There are no signs of that yet.”

Why does pricier oil shift interest rate expectations?

The National ties energy to inflation: the war keeps energy prices high, which raises the odds of another interest rate increase by the US Federal Reserve, whose meeting is set for next week. Analysts now expect a second consecutive hike. Analysts at the US energy company Duncan Oil said (our translation):

“Brent hovering near five-month highs, after geopolitical tensions in the Middle East, has again stirred fears of stubborn inflation. Rising energy costs have led investors to believe that the Fed will keep rates higher for longer in order to tame inflation.”

While the conflict between the US and Iran continues, crude shipments from the Middle East remain constrained. According to The National, Gulf producers have moved tanker transfers as far as the coast of India and cut prices so oil keeps reaching Asia, while the improvised export network around the Strait of Hormuz suffers congestion and attacks. Before the war, a fifth of the world’s energy exports passed through that strait.

The International Energy Agency (IEA) agreed last week to release more than 20 million barrels of diesel from reserves. Wholesale diesel has topped $200 in Singapore and stands at about $220 in Europe and the US, according to the IEA; the source does not state the unit of that price clearly, so we do not state it either. US Energy Secretary Chris Wright said on Monday that Washington is ready to let sanctioned tankers begin a process of legitimate oil transport. Kpler estimates this would do little for record freight rates: of nearly 160 vessels under sanctions from the US Office of Foreign Assets Control (OFAC), only 24 could return to regular trade once age and ownership restrictions are taken into account.

How did gas and European stocks react?

Dutch TTF gas for November opened the day at 88.75 euros per megawatt-hour, or about 932 euros per 1,000 cubic meters. European stock markets are mostly lower in morning trading:

• Germany’s DAX: down 0.46 percent
• France’s CAC 40: down 0.18 percent
• Britain’s FTSE 100: down 0.19 percent
• Italy’s FTSE MIB: down 0.31 percent
• Russia’s IMOEX in Moscow: up 1.41 percent

The reasons cited are political and fiscal uncertainty in France, expensive energy and caution ahead of tech earnings. Analysts still expect third-quarter profits for companies in the STOXX 600 index to rise 20.7 percent from a year earlier, after growth of 24 percent in the second quarter, Reuters reports. Technology is expected to grow almost 33 percent, and industrials about 11 percent. ABB, Michelin and EssilorLuxottica report results, General Motors and Philip Morris before the US open, and Netflix after the close.

Gold fell to $4,131.77 a troy ounce, while wheat rose to $6.5575 a bushel. On Wall Street on Monday, the Dow Jones lost 0.07 percent and closed at 51,966.03 points, the S&P 500 gained 0.41 percent to 7,690.73, and the Nasdaq rose 1.11 percent to 26,430.89 points. According to a preliminary Reuters poll, analysts expected US crude inventories to have fallen last week, along with stocks of refined products.