Oil prices have risen sharply after Iran rejected calls to end support for attacks by Houthi rebels on vessels in the Red Sea and sent a warship to the vital trading route.
In the first trading session of the new year, Brent crude rose $1.28, or 1.7 per cent, to $78.32 a barrel on Tuesday, while US West Texas Intermediate crude was at $72.69 a barrel, up $1.04, or 1.5 percent.
Prices were driven higher by fears of supply disruption amid the Red Sea tensions, leading to the Suez Canal.
Some shipping companies have paused sailings on the route, favouring a much longer trip around the tip of Africa. Rerouting the vessels will add time and expense for shipping companies.
“Any escalation of conflict in this region is certainly going to add more of a risk premium on Brent,” Neil Beveridge, senior energy analyst at Bernstein, a global research firm, told CNBC. He noted, however, that there won’t be any major impact just yet.
“We haven’t seen the Iranian naval incursions before. And as long as it doesn’t lead to any escalation, then I don’t see any significant impact at this level,” he added.
The Houthi group has been attacking vessels in the Red Sea, targeting Israeli ships and other vessels headed to or from Israel, in retaliation for the country’s war in Gaza that has so far killed nearly 22,000 people there.
Major shipping companies stopped traversing the Suez Canal and Red Sea routes in early December, choosing to reroute via southern Africa instead — a longer and more expensive journey with ocean freight rates hitting as high as $10,000 per container.
German container shipper Hapag-Lloyd said Friday it would continue to divert its vessels around the Suez Canal.
However, the launch of Operation Prosperity Guardian, a multinational maritime force by the U.S., has bolstered the confidence of shipping companies. Danish shipping giant Maersk said Sunday it would resume operations in the Red Sea and the Gulf of Aden.
Oil prices were also supported by hopes of strong demand over China’s spring festival holidays in February and economic stimulus in the country, which is the top importer of crude.
A Reuters survey of economists and analysts predicted that the average price of Brent crude would be $82.56 a barrel this year, slightly higher than the 2023 average oil price of $82.17, as they expect global tensions to remain but demand to be capped by weak global growth.
Iran state media reported that the Alborz destroyer crossed the Bab-el-Mandeb strait and entered the Red Sea on Monday but did not specify its mission except to say that it periodically conducted operations in the Red Sea to secure shipping routes.
The move comes as the UK is reportedly considering airstrikes on Houthi rebels, and the US said its navy sank three boats that had been targeting a container ship in the Red Sea.
The US said its helicopters had fired at four boats from Houthi-controlled areas in Yemen that had attacked a commercial vessel owned by the shipping company Maersk. On Sunday, Maersk said its crew was safe and would pause all Red Sea shipping for 48 hours.
The incident was the latest of nearly 20 attacks that have led some shipping companies to abandon the Red Sea route altogether.