Oil edges lower after rising on expanding Middle East conflict

Brent crude traded below US$106 per barrel on Wednesday, after jumping more than 6% over the previous three sessions. The rise was primarily due to worries that escalating conflict in the Middle East could disrupt supply. West Texas Intermediate approached US$93. In New York, diesel prices fell for the third consecutive day as Russia agreed to release more supply following a request by US President Donald Trump.

Recent drone and missile attacks by Iran-backed Houthi militants on Saudi Arabia's main airport have increased pressure on Washington to escalate its involvement in the Yemen conflict. President Trump alleged violations of his "energy ceasefire" between Ukraine and Russia. Ukrainian President Volodymyr Zelenskyy stated his nation would continue attacking Russia, as its energy infrastructure remains targeted.

Oil has surged over 70% this year as tensions in the Middle East affect energy markets. The attacks on Saudi Arabia followed Riyadh-led forces' efforts to retake Houthi-controlled territory in Yemen. Meanwhile, several tankers in the Strait of Hormuz have been targeted, causing supertankers to avoid the Persian Gulf. Scott Shelton, an energy specialist at TP ICAP, noted the chaotic start to the week, citing Trump's claims of an "energy ceasefire" and the Houthi attacks on Saudi Arabia.

Houthi assaults on Riyadh's main airport killed at least 16 people, including a US citizen, and wounded around 300. President Trump has suggested he might join Saudi-backed strikes against the Iran-aligned group. Saudi Arabia aims to increase its oil export capacity by adding 1.2 million barrels per day using existing gas pipelines within a week or two, and expanding a bypass pipeline by 40% to 10 million barrels per day within two to three years.

These moves come despite recent sharp recovery in Middle East oil flows. Some Wall Street banks have reported that crude shipments from the region have returned to near pre-war levels, but this progress may also leave the market vulnerable to another major supply disruption, warns Haris Khurshid, chief investment officer at Karobaar Capital.

He emphasized that while the system has managed to keep oil flowing, it may not be prepared for another significant disruption, highlighting the market's potential underestimation of this risk.