In a volatile Tuesday trading session, oil prices soared over 2%, reaching their highest level this month. Brent crude futures settled $2, or 2.5%, higher at $81.07 per barrel, while US West Texas Intermediate crude saw a $2.01, or 2.7%, increase, reaching $75.57.
The surge was fueled by a combination of factors, including concerns over shipping disruptions in the Red Sea and optimistic expectations of interest rate cuts that could stimulate economic growth and fuel demand.
In the wake of renewed attacks on ships in the Red Sea, worries about potential shipping disruptions escalated. Yemen’s Iran-backed Houthi militia claimed responsibility for a missile attack on a container ship, heightening geopolitical tensions in the Middle East. The Houthi militia also attempted a drone attack on Israel, prompting retaliatory actions by the Israeli military in Iraq, Yemen, and Iran.
Despite these concerns, actual oil supply has not been directly impacted. Maersk and CMA CGM have taken steps to mitigate risks, with Maersk restarting shipping routes through the Red Sea, and CMA CGM increasing vessel traffic through the Suez Canal, a crucial route for approximately 12% of global trade.
The disruptions in the Red Sea have led to rerouting of ships around the horn of Africa, contributing to increased prices and risks, according to Tim Snyder, an economist at Matador Economics. The situation poses challenges for shipping companies and raises apprehensions about the potential negative start to the year 2024.
Meanwhile, Israel’s military chief, Herzi Halevi, indicated that the conflict with Hamas in Gaza is expected to persist for several months, further adding to geopolitical uncertainties in the region.
Oil prices also found support from expectations that the Federal Reserve would implement interest rate cuts in the coming year. The anticipation of lower interest rates, which could reduce consumer borrowing costs, provides a potential boost to economic growth and, consequently, oil demand.
The decline in the dollar index, nearing a five-month low, also contributed to the oil price surge. A weaker dollar makes dollar-denominated oil more affordable for investors holding other currencies, thereby increasing demand.
Traders are actively betting on a rate cut by the Federal Reserve in March 2024, with an 86% likelihood, compared to approximately 21% in November, according to the CME Group’s FedWatch tool.
Looking ahead, the market will keep a close eye on U.S. crude stockpiles, with expectations of a 2.6 million barrel decrease in the week ending December 22. Preliminary Reuters polls suggest a likely increase in distillate and gasoline inventories, adding further complexity to the evolving oil market landscape.
Source: Reuters
