High Oil Prices Can Jeopardize a US Soft Landing

Oil prices jumped higher on Friday after US and UK attacked Houthi rebels. Analysts think further escalation in the conflict may propel Brent above $80.

Oil prices spiked on Friday after the US and its allies attacked Houthi targets in Yemen, responding to the rebels’ previous assaults on merchant vessels. If the conflict continues to sustain, analysts believe Brent and WTI prices could cross $75 and $80, respectively. This could also rekindle inflationary pressures and complicate the Fed’s aim for a soft landing in the US economy.

Red Sea Conflict Marks Escalation in Middle East Tensions

The US and UK forces launched airstrikes on over a dozen Houthi targets in Yemen, marking the latest development in the ongoing Red Sea conflict.

Reports indicate that the recent attacks were a response to a series of Houthi assaults on merchant vessels in the past few weeks. This conflict marks the latest significant escalation in the ongoing tensions in the Middle East, a situation that has been simmering for months.

Since the Gaza war erupted, the Houthi rebels have unveiled a spate of strikes on vessels in the Red Sea, a key international shipping route. The assaults disrupted trade flows, adding to the upward pressure that supply constraints are placing on global inflation. 

Analysts Say Further Deterioration Could Propel Brent Over $80

The retaliation attack by the US and its allies weighed on sentiment among investors, with oil prices making the most pronounced movement. 

Crude oil surged higher on Friday on fears that further escalation in the conflict could bring more disruption to shipping or even spark a broader regional war. Brent crude jumped more than 2.8% to $79.58, and the WTI rose over 3% to $74.22. 

UBS commodity strategist Giovanni Staunovo said the oil price surge was fueled by the market’s fears over further escalation. On the other hand, “any risk premium will only sustain if there are disruptions to oil supply,” he said.

“We look for higher prices over the coming months, expecting Brent to move above $80 a barrel, as a result of OPEC+ production cuts keeping the oil market slightly undersupplied.”– Staunovo said.

Westpac Banking’s head of commodity and carbon research, Robert Rennie, said markets had been too concentrated on rising global supply through the end of last year. At the same time, the continuing deterioration in the Red Sea conflict has been underplayed in 2024. With Houthi leaders claiming they would respond to any US attack, WTI could jump above $75 a barrel, and Brent could exceed $80, Rennie noted. 

In addition, further exacerbation of the situation could also become a concern from an inflationary standpoint. Oil plays a vital role in the global economy and has been among the key inflation drivers over the past two years.

As such, an abrupt upswing in oil prices could make it more difficult for the Federal Reserve to reduce inflation to the desired 2% and orchestrate the so-called soft landing. The US central bank said last month it plans to begin cutting interest rates in 2024, but unexpected inflationary pressures could force the policymakers to delay the moves. 

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Originally Posted January 12, 2024 – High Oil Prices Can Jeopardize a US Soft Landing

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