Oil price could surge to $US150 as war engulfs major Middle East supply routes

The Strait of Hormuz, Red Sea and Saudi Arabia are now battlegrounds as war intensifies. Yemen's Iran-aligned Houthis launched dozens of missiles and drones at a Saudi military base overnight, following an attack that crippled the East-West pipeline on Thursday. This pipeline was crucial in circumventing the blockaded Strait of Hormuz, which provides roughly 20% of the world's oil supply.

The Houthis have rapidly advanced, capturing territory including Perim Island at the Red Sea's mouth, pushing oil prices above $US100 per barrel. Meanwhile, a British maritime security agency reported another vessel struck by a projectile in the strait, resulting in a fire. This conflict complicates efforts to minimize global oil supply disruption for US President Donald Trump and other authorities.

Saudi Arabia, leading a coalition against the Houthis since 2015, had maintained a ceasefire, but it broke down in July as Houthi strikes targeted Abha Airport and a naval blockade against Saudi-linked ships began. Global benchmark Brent crude and US West Texas Intermediate (WTI) crude both surpassed $US107 and $US103 per barrel, respectively.

The Australian benchmark, Tapis, is trading at $US110 per barrel, a 46% increase since July. The impact on fuel prices is imminent, with NRMA reporting an average unleaded petrol price of $2.19 per litre and diesel at $2.68 per litre. Oil analyst Vivek Dhar warns that the closure of the East-West pipeline means 65-70% of prewar flows are now required, putting the world weeks away from critically low oil supply levels.

If inventory depletion occurs, Brent oil futures may need to rise to around $US150 per barrel, higher than during the global financial crisis in 2008. This could lead to uncontrolled demand destruction in emerging Asian economies, making it difficult for Trump to avoid a scenario resembling defeat or capitulation in the US-Iran war.