Oil prices settle higher as traders monitor Middle East tensions

Iran-backed Houthi rebels operating out of Yemen earlier this week launched their heaviest barrage yet of missiles and drones aimed at Red Sea shipping vessels.

The attacks, launched in the wake of the start of the Israel-Hamas war in October, have targeted ships in the Red Sea, which links the Middle East and Asia to Europe via the Suez Canal, and its narrow Bab el-Mandeb Strait. That strait is only 18 miles wide at its narrowest point, limiting traffic to two channels for inbound and outbound shipments, according to the U.S. Energy Information Administration. Nearly 10% of all oil traded at sea passes through it. An estimated $1 trillion in goods pass through the strait annually.

The U.S. military said the drones and missiles were downed without causing damage, but the persistent attacks have forced shippers to avoid the waterway. The U.S., meanwhile, is weighing strikes against land-based Houthi targets in Yemen in response to the attacks, the Wall Street Journal has reported.

Houthi rebels in 2019 made significant attacks on energy assets in the United Arab Emirates and Saudi Arabia, both of which were also targeted by Houthi rocket and missile strikes, after the U.S. ended exemptions for importers of Iranian crude and imposed maximum-pressure sanctions, noted Helima Croft, head of global commodity strategy at RBC Capital Markets.

“We could envision a scenario where the Houthis would revive such tactics if the U.S. and its allies directly target their bases in Yemen in response to the escalating maritime confrontations. Red Sea economic infrastructure, including the Jizan and Jeddah refineries, could be at particular risk,” she wrote.

Moreover, if Iran is drawn more directly into the conflict, it could again target tankers in the Strait of Hormuz and sabotage regional energy facilities in order to internationalize the cost of the war, Croft said.

Over in the Gulf of Oman, Iran seized an oil tanker Thursday, with some speculating that the move is a retaliation of last year’s U.S. seizure of an Iranian tanker, said StoneX’s Kansas City energy team, led by Alex Hodes, in a Thursday note.

“This incident is away from the Red Sea but signals that tensions in the Middle East are high,” they said. 

Read: Oil tanker in Gulf of Oman boarded and seized by men in military uniforms

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Oil traders also reacted to U.S. data showing that consumer prices rose 3.4% year over year in December, faster than the 3.1% rise seen in the previous month.

The higher-than-expected figure will likely decrease chances that the Federal Reserve will cut interest rates at its March meeting, said Robert Yawger, director of energy futures at Mizuho Securities USA, in a daily report.

 A rate cut, however, “would be a positive demand-growth event for crude oil — the sooner the better,” he said.

A report from the Energy Information Administration released Wednesday contributed to pressure on oil prices — revealing an unexpected weekly rise in U.S. crude supplies along with hefty gains in gasoline and distillate inventories.

Separately on Thursday, the EIA reported that natural-gas supplies in U.S. storage fell by 140 billion cubic feet for the week ended Jan. 5. On average, analysts surveyed by S&P Global Commodity Insights expected to see a decline of 122 billion cubic feet.

Natural-gas prices ended higher Thursday, contributing to gains for the week as U.S. winter-weather forecasts boost demand prospects for the commodity.

—Associated Press contributed to this article.