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Oil prices fell on Tuesday as traders watched escalating tensions in the Red Sea amid record U.S. crude production and concerns about demand in China.
The February West Texas Intermediate contract lost $1.27, or 1.77%, to close at $70.38 a barrel. As for Brent, the March contract fell $1.15, or 1.49%, to trade at $75.89.
Crude oil prices had risen more than 2% early in the session amid escalating tensions in the Red Sea, a key global trade corridor.
Helima Croft, head of global commodities strategy at RBC Capital Markets, said oil prices did not reflect rising tensions as traders remained unconvinced a major supply disruption was imminent.
“The market is basically saying, ‘We’re going to wait until something happens,'” Croft told CNBC on Tuesday. “But it’s getting more dangerous every day,” she said of tensions in the region.
Traders are more focused on the macro backdrop of record U.S. production and weakening demand in China, said Adi Imerovic, a veteran oil trader who now works as an energy security expert at the Center for Strategic and International Studies.
Danish shipping giant Maersk announced on Tuesday it would suspend shipping through the Red Sea until further notice after one of its ships was attacked by militants over the weekend.
“Any escalation of the conflict in this region will certainly result in a further risk premium for Brent,” Neil Beveridge, senior energy analyst at Bernstein, told CNBC. However, he pointed out that there would be no significant impact yet.
“We have never seen Iranian naval incursions before,” Beveridge said. “Unless it really escalates, I don’t see any significant impact at this level.”
In response to the country’s war in Gaza, the Houthi group is attacking ships in the Red Sea, targeting Israeli ships and other vessels traveling to and from Israel.
Major shipping companies stopped sailing via the Suez Canal and Red Sea in early December, opting instead to reroute via South Africa – a longer and more expensive journey with sea freight rates of up to $10,000 per container.
German container shipping company Hapag-Lloyd said today, Friday, that it would continue to reroute its ships around the Suez Canal.
America created a multinational naval force called Operation Prosperity Guardian to protect trade on the vital waterway.
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