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Oil jumps 3% amid attacks on ships in the Red Sea, rate cut hopes

A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration/file photo


Oil prices surged by 3% on Tuesday, reaching their highest level this month. The spike was attributed to concerns over shipping disruptions in the Red Sea due to further attacks on ships and optimism about potential interest rate cuts that could stimulate economic growth and increase fuel demand.

Brent crude futures rose by $2.32, or 2.93%, to $81.40 a barrel, while U.S. West Texas Intermediate crude increased by $2.26, or 3.1%, to $75.81.

The escalation followed last week’s gains of approximately 3%, driven by Houthi attacks on ships and ongoing violence in Gaza. Geopolitical tensions in the Middle East, particularly in the Red Sea, contributed to market apprehension regarding the security of oil transit.

Explosions off the coast of Yemen in the Red Sea were reported, with unmanned aircraft and missiles sighted in separate incidents. The Houthi group claimed responsibility for launching missiles at a commercial ship, adding to concerns about the safety of shipping routes.

An Israeli minister hinted at retaliation in Iraq, Yemen, and Iran, expanding the regional conflict beyond the Gaza Strip. While shipping companies temporarily suspended routes through the Red Sea, actual oil supply has not been impacted significantly. Maersk recently announced the resumption of shipping routes through the Red Sea, alleviating some concerns.

The Red Sea is a crucial route connecting to the Suez Canal, used for about 12% of global trade. Shipping companies had rerouted vessels and imposed surcharges due to the increased risks in the region.

Germany’s Hapag-Lloyd is set to decide on the continuation of its Red Sea routes after temporarily suspending shipments.

The ongoing conflict between Israel and Hamas-led militants in Gaza, coupled with geopolitical tensions, has heightened uncertainties in the oil market. Additionally, expectations of future interest rate cuts by the Federal Reserve have provided support to oil prices. A potential rate cut is seen as a measure to stimulate economic growth, subsequently boosting oil demand.

The dollar index’s decline on Tuesday, nearing a five-month low, has also contributed to the oil price increase. A weaker dollar makes dollar-denominated oil more attractive for investors holding other currencies.

Traders are anticipating a rate cut of at least 25 basis points by the Federal Reserve in March 2024, with a significant shift in expectations compared to November, according to the CME Group’s FedWatch tool. The current stance suggests an 86% probability of a rate cut in March 2024, up from about 21% in November.

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