Oil prices increased by 1% on Tuesday, starting the New Year higher after U.S. forces repel Houthis in Red Sea. Oil prices increased as a Red Sea U.S. Naval coalition focused attention on potential Middle East supply disruptions and expectations of Chinese economic stimulus boosted the demand outlook of the biggest importer of crude oil.
Oil prices increase was seen with Brent crude rising $1.03, or 1.3%, to $78.07 a barrel by 0225 GMT while U.S. West Texas Intermediate crude was at $72.53 a barrel, up 88 cents, or 1.2%.
Oil prices increased led by risk of conflict
The risks of the Israel-Gaza conflict morphing into a wider regional conflict rose over the weekend after U.S. helicopters repelled an attack on Sunday by Iran-backed Houthi militants on a Maersk container vessel in the Red Sea. This attack sank three Houthi ships and killing 10 militants, according to accounts by American, Maersk, and Houthi officials.
Iran also supports Hamas, the ruling faction in Gaza fighting Israel, and other groups Tehran back across the Middle East have launched attacks on U.S. forces in the region and Israel. A wider conflict could close crucial waterways for the transportation of oil supplies such as the Red Sea and the Straits of Hormuz in the Gulf.
“The oil price may be affected by the escalation of the situation in the Red Sea over the weekend and the peak demand season during China’s Spring Festival,” Leon Li, a Shanghai-based CMC Markets analyst said, in reference to the Chinese New Year holiday from early February.
Price rebound expectation
He added that the forecast holiday demand is raising expectations for a price rebound in January.
Following the naval battle, an Iranian warship has sailed into the Red Sea, Iranian media reported on Monday.
At least four tankers transporting diesel and jet fuel from the Middle East and India to Europe are taking the longer route around Africa to avoid the Red Sea, ship tracking data show.
China’s stimulus measures
Investors’ expectations for fresh stimulus measures in China rose after manufacturing activity in December shrank for a third month, government data showed on Sunday. However, a private sector report on Tuesday showed an expansion in the sector last month, though factory owners’ confidence in the 2024 outlook declined from November.
A stimulus could provide a fillip to economic growth, potentially boosting oil demand in the world’s second-largest oil consuming nation, and also lend support to prices.
Oil fall in 2023
The prospect of slowing global economic growth and growing concerns of rising supply especially from producers outside the Organization of the Petroleum Exporting Countries caused Brent and WTI to fall more than 10% in 2023 to close out the year at their lowest year-end levels since 2020.
Brent crude would average $82.56 a barrel in 2024, as per a poll showed on Friday, as analysts predicted weak global growth would cap demand, while geopolitical tensions could provide support. Brent averaged $82.17 in 2023.
