On Tuesday, oil prices surged by 3% to reach its highest level this month, driven by additional attacks on ships in the Red Sea, which raised concerns about potential shipping disruptions.
The surge was also fueled by expectations of interest rate cuts that could stimulate economic growth and increase demand for fuel. Brent crude futures saw an increase of $2.32, or 2.93%, reaching $81.40 per barrel by 1:15 p.m. ET (1815 GMT), while U.S. West Texas Intermediate crude rose by $2.26, or 3.1%, reaching $75.81.
The rally, in thin trade with some markets, closed for holidays, added to last week’s gains of about 3% after Houthi attacks on ships worried investors and as the violence in Gaza showed no sign of easing.
“There’s plenty of geopolitical tensions today in terms of the Middle East … and it has given some angst here to the security of the transit of oil and other goods,” said John Kilduff, partner with Again Capital LLC.
Explosions in the Red Sea off the coast of Yemen were reported on Tuesday after sightings of unmanned aircraft and missiles in two separate incidents, a British maritime authority said.
Yahya Sarea, Yemen’s Houthi military spokesman said on Tuesday the group launched an attack with missiles on a MSC United commercial ship in the Red Sea after it rejected three warning calls.
An Israeli minister on Tuesday hinted that the country had retaliated in Iraq, Yemen and Iran for attacks carried out against it as the war with Hamas-led militants in the Gaza Strip widens to other areas of the region and the Palestinian death toll continues to climb.
Despite concern about the Middle East and the re-routing of ships, actual supply has not yet been affected. Maersk on Sunday announced the restart of shipping routes through the Red Sea, easing the concerns to some extent.
Shipping companies had stopped sending vessels through the Red Sea and imposed surcharges for re-routing ships. The Red Sea connects with the Suez Canal, a major shipping route used for about 12% of global trade.
Germany’s Hapag-Lloyd will decide on Wednesday how it will proceed with its Red Sea routes after suspending shipments there, a spokesperson said on Tuesday.
“We have issues in the Red Sea, causing ships to go around the horn of Africa, adding to price and risk,” said Tim Snyder, an economist at Matador Economics. “This could turn out to be a not-very-good start to 2024.”
Meanwhile, Israel’s military chief, Herzi Halevi, said the war on Hamas in Gaza will likely go on for many months.
Oil also found support from expectations the Fed will cut interest rates next year. Lower interest rates cut consumer borrowing costs, boosting economic growth and oil demand.
The dollar index edged lower on Tuesday, within sight of a five-month low of 101.42 struck on Friday. A softer greenback makes dollar-denominated oil less expensive for investors holding other currencies, boosting demand.
Traders’ bets that the central bank will deliver a rate cut of at least 25 basis points in March 2024 stand at 86%, compared with about 21% in November, according to the CME Group’s FedWatch tool.
