Oil prices up on rising Red Sea tensions; rebounding after weak 2023

Oil prices surged higher Tuesday, bouncing after hefty losses in 2023 on rising concerns of supply disruptions through the crucial Red Sea region.

By 09:20 ET (14.20 GMT), the U.S. crude futures traded 1.4% higher at $72.33 a barrel and the Brent contract climbed 1% to $77.78 a barrel.

Rising tensions in Red Sea

Tensions are rising in the Red Sea, a crucial trade route between Asia and Europe, after U.S. forces struck back against the Iran-backed Houthi group in the Red Sea, reportedly killing about 10 Houthi fighters and sinking three boats of the Yemeni group.

This prompted Iran to send a warship to the region, the country’s state media reported on Monday, without elaborating on details of its mission, while the the Houthis said they had no intention of easing up on the strikes, which they claimed were in retaliation for the Israel-Hamas conflict. 

A wider conflict could close crucial waterways for oil transportation, adding a premium to the market.

Danish shipping giant Maersk is set to decide later Tuesday whether to resume sending vessels through the Suez Canal via the Red Sea following an attack on one of its ships in the region last weekend.

Crude benchmarks dropped 10% in 2023 

Both contracts shed over 10% each in 2023, coming under pressure from persistent concerns over sluggish demand and higher-than-expected supply conditions. 

An economic rebound in top importer China failed to materialize in the year, while production cuts from the Organization of Petroleum Exporting Countries and allies largely underwhelmed markets.

Weak economic data from China also continued to pile in, as purchasing managers index readings for December showed more deterioration in business activity - particularly the manufacturing sector.

But the steep annual losses in crude attracted some bargain buying at the beginning of the new year. Traders also held out for any more production cuts from the OPEC+, although signs of discord in the production group, after Angola’s unexpected exit, kept expectations low.

With U.S. production remaining at record highs in recent weeks, global oil markets are expected to be less tight than initially expected in the first quarter of 2024. This notion, coupled with signs of weakening demand in China, is expected to keep oil prices subdued.

Still, crude prices may see some near-term relief amid growing optimism over early interest rate cuts by the Federal Reserve. Nonfarm payrolls data due this Friday is expected to provide more cues on the path of interest rates.

A weaker dollar also afforded some strength to oil prices.