Oil prices soar 1.5% in the new year as potential supply disruptions in the Middle East, following a naval clash in the Red Sea, have triggered this significant increase. This surge is further bolstered by expectations of strong holiday demand and the prospect of economic stimulus measures in China, the foremost crude importer globally.
The beginning of the year witnessed oil prices soar 1.5% in the new year, with Brent crude experiencing a significant rise of $1.20, reaching $78.24 a barrel by 0438 GMT. This upward trend was mirrored in the U.S. West Texas Intermediate crude, which saw an increase to $72.66 a barrel, up by $1, or 1.4%.
A Reuters survey involving economists and analysts projected that Brent crude would average around $82.56 a barrel this year, a slight increase from 2023’s average of $82.17. Despite predictions of constrained global growth potentially capping demand, analysts anticipate that ongoing geopolitical tensions could support oil prices.
The escalation in the Middle East began when U.S. helicopters effectively countered an attack by Iran-backed Houthi militants on a Maersk container vessel in the Red Sea. This action resulted in the sinking of three Houthi ships and the loss of 10 militants, raising concerns about the Israel-Gaza conflict potentially expanding into a broader regional confrontation.
Leon Li, a Shanghai-based analyst with CMC Markets, highlighted the influence of these developments on oil prices, especially considering the upcoming peak demand period during China’s Spring Festival, coinciding with the Lunar New Year in early February. Li also noted the anticipated increase in Chinese holiday demand as a factor contributing to expectations of a price rebound in January.
The potential for a wider conflict in the region raises alarms about the closure of critical waterways essential for oil transportation, such as the Red Sea and the Straits of Hormuz. Following the naval clash, an Iranian warship was reported to have entered the Red Sea, further heightening tensions.
In response to the instability in the Red Sea, at least four tankers carrying diesel and jet fuel from the Middle East and India to Europe have been rerouted around Africa, as evidenced by ship tracking data.
In China, expectations for new stimulus measures have grown in response to the continued shrinkage of manufacturing activity, as reported in government data. Such a stimulus could bolster economic growth, enhance oil demand in the world’s second-largest oil-consuming nation, and support oil prices.