Brent crude prices climbed above $107 a barrel as growing security concerns around major Middle Eastern shipping routes increased pressure on global oil supplies and pushed up the cost of transporting crude.
The Houthis have moved closer to the Bab el-Mandeb Strait, a critical waterway for oil shipments leaving the Middle East. Although vessel-tracking platforms show that ships are still passing through the narrow route at the southern entrance of the Red Sea, reports indicate that the Houthis have warned they could target Saudi vessels attempting to use the passage.
Oil tankers can avoid the threatened route by travelling through the Suez Canal and then around Africa before reaching Asian markets. However, that alternative adds about 22 days to the journey and significantly increases expenses for fuel and vessel hire.
Tanker freight rates reached record levels last week, while shortages of bunker fuel have added further pressure to shipping costs. Around 80 per cent of global trade is transported by sea, meaning prolonged disruption to major maritime routes could have wider consequences for international commerce.
Saudi Arabia’s crucial East-West oil pipeline, which provides the kingdom with a major alternative route to the Strait of Hormuz, was also targeted in drone attacks launched from Iraq. The pipeline had been carrying between 4 million and 5 million barrels of crude per day.
Further uncertainty emerged after a planned meeting between Iran and other Persian Gulf countries to discuss establishing a safe passage through the Strait of Hormuz was postponed.
The developments pushed Brent crude up about 3 per cent to $107.81 a barrel, while US crude rose 2.9 per cent to $102.94.
Persistently high oil prices could complicate the Federal Reserve’s policy decision this week because higher energy costs can add to inflationary pressure.
Markets were pricing in an 86 per cent probability of a 25-basis-point rate increase on Wednesday, which would be the first increase since mid-2023.
Several major US investment firms, including Goldman Sachs and JPMorgan, shifted their forecasts towards a rate hike on Friday. Citi also moved away from its long-standing expectation for rate cuts and acknowledged that a single increase was now likely this week.
Investors are viewing the decision as an important test of the Federal Reserve’s credibility under Chair Kevin Warsh. A rate increase could also anger President Donald Trump, who has continued to argue that the United States should maintain the lowest interest rates in the world.
Inflation concerns are also weighing on bond markets. Even if the Fed keeps rates unchanged, investors could push longer-term bond yields higher, with the 10-year US Treasury yield already close to the psychologically important 5 per cent level.
If the central bank raises rates as expected, attention will shift to its economic projections and the so-called dot plot for indications of future policy moves, as well as Warsh’s subsequent media briefing.
Markets are currently pricing in roughly 90 basis points of additional tightening by the second half of next year, reflecting expectations that the Fed is unlikely to raise rates only once.
Elsewhere, traders see about a 76 per cent probability that the Bank of Japan will increase its policy rate by 25 basis points to 1.25 per cent on Friday. The bank is also expected to maintain a hawkish tone on further increases, particularly as policymakers seek to support the yen.
The Bank of England is scheduled to meet on Thursday, with markets assigning only a 25 per cent probability to a rate increase. The decision is nevertheless expected to produce another divided vote among policymakers.
Meanwhile, concerns over the potential risks posed by artificial intelligence are gaining further attention. OpenAI Chief Executive Sam Altman has warned of a 10 per cent possibility that AI could contribute to human extinction by the end of the decade.
Growing political pressure to slow AI development has also been linked to declines in technology stocks in Japan and South Korea, with SoftBank among the notable companies affected.
Key developments that could influence markets on Monday include appearances by European Central Bank President Christine Lagarde and ECB board members Isabel Schnabel, Piero Cipollone and Pedro Machado.
