Red Sea Tensions Simmer as Oil Prices Spike 2% on Fears of Disrupted Supply

Tuesday saw a 2% increase in oil prices worldwide, breaking a three-day downward trend as a result of supply disruptions brought on by a dispute in the Red Sea and predictions of a significant economic stimulus in China, the world's largest importer of crude oil.

At the moment, the price of a barrel of Brent crude is $78.33, up 1.95% from the previous day.

Although WTI, or West Texas Intermediate crude, is currently up 2.1% from its previous close to trade at $72.87 a barrel.

It is important to note that the two-year winning streak in oil prices came to an end in 2023, with benchmarks Brent and WTI declining by 10.45% and 11.32%, respectively.

According to Reuters, American helicopters thwarted an attempt by Houthi militants supported by Iran to storm a Maersk cargo ship in the Red Sea on Sunday. This resulted in the loss of three Houthi ships and the deaths of ten militants, raising the possibility that the Israel-Gaza battle could expand into a larger regional confrontation.

According to Leon Li, a CMC Markets analyst based in Shanghai, "the oil price may be affected by the escalation of the situation in the Red Sea over the weekend and the peak demand season during China's Spring Festival," referring to the early February Lunar New Year holiday.

Li also mentioned that anticipations of a price recovery in January were being raised by the anticipated demand for the Chinese holidays.

Wider-ranging hostilities may shut off vital waterways, like the Red Sea and the Gulf's Straits of Hormuz, that are used to carry oil supplies. Iranian television said on Monday that an Iranian warship entered the Red Sea following the naval combat.

Ship tracking data indicates that a minimum of four tankers carrying diesel and jet fuel from the Middle East and India to Europe are circumnavigating Africa in order to avoid the Red Sea.

Following the third consecutive month of declines in manufacturing activity in December, official statistics released on Sunday raised investor expectations for further stimulus measures in China.

In addition to supporting prices, a stimulus may promote economic development and increase oil consumption in the second-largest oil-consuming country in the world.