Oil jumped 3% on Tuesday to its highest level this month, as further attacks on ships in the Red Sea prompted fears of shipping disruptions and hopes of interest rate cuts that could boost economic growth and fuel demand.
Brent crude futures were up $2.41, or 3.1%, at $81.48 a barrel by 11:52 a.m. ET (1652 GMT). U.S. West Texas Intermediate crude rose $2.36, or 3.2%, to $75.92.
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 Israel-Hamas conflict 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.
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 Palestinian militants in the Gaza Strip widens to other areas of the region.
Despite concerns 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 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.
Separately, the U.N. nuclear watchdog said Iran has reversed a months-long slowdown in the rate at which it is enriching uranium to up to 60% purity, close to weapons grade.
Meanwhile, Israel’s war on Hamas in Gaza will likely go on for many months, the country’s military chief, Herzi Halevi, said on Tuesday.
Oil also found support from expectations the Fed will cut interest rates next year. Lower interest rates cut consumer borrowing costs, which can boost 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 (NASDAQ:CME) FedWatch tool.
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