Yemen could become a new flashpoint for escalation in the Middle East – Freedom

The expansion of the conflict in the Middle East could support oil prices this week, says Freedom senior analyst Sergey Pigarev. The Islamic Revolutionary Guard Corps could use Yemen’s Houthis to strike the region’s oil and gas infrastructure. Additional support for prices is being provided by shortages of oil and refined products, declining U.S. inventories, and restrictions on fuel exports from Russia.

WTI crude up nearly 10% for the week

Over the past week, the price of U.S. WTI crude rose by 9.7% to $91.50 per barrel. WTI is one of the main benchmark crude grades used to price raw materials in the U.S. market.

The average price of diesel fuel in the United States reached a record $5.85 per gallon. The increase is due to limited global supply of refined products amid the conflict between the United States and Iran, as well as disruptions at Russian oil refineries.

Refined products are obtained from processing crude oil. They include gasoline, diesel and jet fuel, fuel oil, and other products.

Freedom sees the conflict potentially widening

Sergey Pigarev does not rule out that the Islamic Revolutionary Guard Corps may try to expand the geography of hostilities with the help of Iran-backed Yemeni Houthis. Potential targets could include oil and gas infrastructure facilities in Middle Eastern states.

Such attacks could disrupt the production, processing, and transportation of hydrocarbons. Even the threat of disruptions usually increases the geopolitical premium in oil prices, as market participants factor in the risk of reduced supplies.

Reaching an agreement between the United States and Iran still looks unlikely, the analyst believes. A protracted conflict amid shortages of oil and refined products leads to further drawdowns of reserves and increases the market’s sensitivity to new reports of escalation.

U.S. oil inventories continue to decline

The weekly U.S. Department of Energy data was neutral for oil prices. U.S. output increased to 13.86 million barrels per day, but total inventories of oil and refined products fell by 6.1 million barrels.

Commercial crude inventories decreased by 4.5 million barrels to 424.5 million. The U.S. Strategic Petroleum Reserve fell by another 3.1 million barrels to 286.6 million.

The strategic reserve is a government stockpile of oil intended for use during supply disruptions and sharp price spikes. Its reduction limits the authorities’ ability to restrain rising prices through additional sales into the market.

At the same time, refined product inventories rose by 1.4 million barrels to 817.9 million. Sales of gasoline, diesel and jet fuel fell by 0.6 million barrels per day to 14.1 million.

Export restrictions from Russia support fuel prices

High refined product prices are also linked to Russia’s ban on exports of gasoline and diesel fuel after damage to a number of oil refineries. Limiting shipments reduces available supply on the global market and exacerbates the fuel shortage.

Earlier, Freedom wrote about oil prices rising by more than 6% after Iran stated that it was impossible to reopen the Strait of Hormuz until the United States met its demands. Before the conflict, about one-fifth of global supplies of oil and liquefied natural gas passed through this route.

Later expectations for the resumption of shipping through the Strait of Hormuz led to a decline in the geopolitical premium in prices. However, tanker traffic remained significantly below normal levels, and U.S. sanctions pressure on Iran limited the potential for further declines in oil prices.

U.S. drilling activity unchanged

The total number of active drilling rigs in the United States remained at 588 over the week, which is 9.5% higher than a year earlier. The number of oil rigs increased by two to 458, while gas rigs fell by two to 130.

A drilling rig is used to create wells through which oil or natural gas is produced. Changes in their number help assess future production activity: an increase in the number of rigs can eventually lead to higher output, although the effect appears with a lag.

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