Oil began the year with a surge, rising 1% on Tuesday after a naval clash in the Red Sea focused investor attention on possible Middle East supply disruptions and expectations that the Chinese government would step in with economic stimulus, increasing the demand outlook in the top crude importer in the world.
Brent crude was up $1.03, for a 1.3% gain, bringing it to $78.07 per barrel as of 02:25 GMT, as West Texas Intermediate crude was at $72.53 per barrel, for an increase of 1.2%, or 88 cents.
Investors grew concerned the Israeli military action in Gaza could morph into a wider regional conflict following a naval clash in which US helicopters repelled an attack Sunday that was launched by Houthi rebels, backed by Iran. The Houthis had launched in boats, seeking to board a Maersk container vessel in the Red Sea, killing ten militants and sinking three Houthi ships, according to a series of accounts by Maersk, American and Houthi officials.
Iran, in addition to backing the Hamas militants in Gaza which launched the October 7th surprise attack on Israel, backs other militant groups throughout the Middle East, including the Houthi rebels of Yemen. Were the US to allow the conflict to widen, even including Iran, it could close crucial waterways vital to the shipment of oil, including the Strait of Hormuz and the Red Sea.
Referring to the Chinese New Year holiday in early February, Leon Li, a Shanghai-based CMC Markets analyst said, “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.”
He added that there is now an expectation of a price rebound in January, after the forecast holiday demand came in high.
Then on Monday, after the naval clash, it was reported by Iranian media that an Iranian warship had sailed into the Red Sea, further heightening tensions.
Many shippers have already routed their cargoes away from the conflict zone in the Red Sea, taking longer, more expensive routes. Ship tracking data shows that there are already at least four tankers carrying jet fuel and diesel bound for Europe from the Middle East and India which have rerouted around Africa to avoid the Red Sea.
Meanwhile, in China investors are expecting to see fresh stimulus measures out of the government following government data which showed a third month in a row of contractions in manufacturing activity.
However there is also a private sector report which claimed there was an expansion in the sector last month, though it also showed that there was a decline in the confidence of factory owners for 2024 compared to the November figure.
Both Brent and WTI fell more than 10% in 2023, ending the year at their lowest points since 2020, off the likelihood of slowing economic growth and increasing concerns of growing supply, particularly from producers outside of the Organization of the Petroleum Exporting Countries (OPEC).
According to a Reuters poll on Friday, analysts, predicting weak global growth would constrain demand, while geopolitical tensions offered price support, forecast Brent crude averaging $82.50 per barrel for 2024. In 2023, Brent averaged $82.17.
