Oil prices fell on Tuesday as traders watched rising tensions in the Red Sea against a backdrop of record US crude production and concerns about China’s demand.
The February West Texas Intermediate contract fell $1.27, or 1.77%, to settle at $70.38 per barrel. The March Brent contract fell $1.15, or 1.49%, to $75.89.
Crude prices had risen more than 2% earlier in the trading session as tensions in the Red Sea, a critical global trade choke point, escalated.
Oil prices, according to Helima Croft, head of global commodity strategy at RBC Capital Markets, do not reflect the increase in tensions because traders are not convinced that a major supply disruption is imminent.
“The market is saying, ‘we will wait and see until something happens,'” Croft said on Tuesday. “But it’s getting much more serious every day,” she said of the region’s tensions.
According to Adi Imsirovic, a veteran oil trader who is now an energy security expert at the Center for Strategic and International Studies, traders are more focused on the macroeconomic backdrop of record US production and faltering Chinese demand.
Maersk, the Danish shipping company, announced Tuesday that it will suspend Red Sea shipping until further notice after one of its vessels was attacked by militants over the weekend.
According to the country’s Tansim news agency, Iran deployed a destroyer to the Red Sea on Monday. The report did not go into detail about the warship’s mission but said Supreme Leader Ayatollah Ali Khamenei emphasized the importance of maintaining a presence in international waters.
The Iranian move comes after US Navy helicopters destroyed three boats belonging to Iran-backed Houthi rebels. The Navy was responding to a distress call from the Singapore-flagged vessel Maersk Hangzhou, which had come under Houthi fire, according to a statement from the US Central Command.
The Houthi group maintained that the boats were engaged in “official duties to secure maritime routes” in a statement issued by a rebel spokesman on Sunday, according to a news channel owned by the rebels.
“Any escalation of conflict in this region is almost certainly going to add more of a risk premium on Brent,” Bernstein Senior Energy Analyst Neil Beveridge said. However, he noted that there would be no immediate impact.
“We’ve never seen anything like the Iranian naval incursions. And as long as it does not result in any escalation, I don’t see any significant impact at this level,” he added.
In retaliation for the country’s war in Gaza, which has killed nearly 22,000 people, the Houthi group has been attacking vessels in the Red Sea, targeting Israeli ships and other vessels heading to or from Israel.
Major shipping companies stopped using the Suez Canal and Red Sea routes in early December, instead opting for a longer and more expensive route via southern Africa, with ocean freight rates reaching $10,000 per container.
Hapag-Lloyd, a German container shipper, said Friday that it would continue to divert its vessels around the Suez Canal.
To protect trade in the critical waterway, the United States has launched Operation Prosperity Guardian, a multinational maritime force.