Oil rises 1% as Red Sea shipping concerns unnerve traders

By Shariq Khan

BENGALURU (Reuters) -Oil prices rose more than a dollar a barrel on Tuesday, extending the previous session’s gains after attacks by Yemen’s Iran-aligned Houthi militants on ships in the Red Sea disrupted maritime trade and forced more companies to reroute vessels.

Brent crude futures rose $1.28, or 1.6%, to settle at $79.23 a barrel, the highest since Dec. 1. U.S. West Texas Intermediate crude futures for January delivery, which expired after settlement on Tuesday, rose 97 cents, or 1.3%, to settle at $73.44 a barrel, also the highest in over two weeks.

The U.S. on Tuesday announced the creation of a task force to safeguard Red Sea commerce from attacks by Iran-backed Yemeni militants. The Houthis have vowed to defy the U.S.-led naval mission and keep hitting Israeli targets in the region.

“How long this will go on for is also an unknown, unnerving the market,” said Fiona Cincotta, senior analyst at City Index. “Despite the launch of the operation to ensure safe passage through the Red Sea major shipping firms are still steering clear.”

On Monday, oil prices rose nearly 2% after a Norwegian-owned vessel was attacked and BP said it had paused all transit through the Red Sea. A number of other shippers have since made similar announcements.

About 12% of world shipping traffic passes up the Red Sea and through the Suez Canal.

“The events in the Red Sea are increasing geopolitical risk,” said Rob Thummel, managing director at Kansas-based energy investment firm Tortoise Capital. “This is causing oil prices to move higher as traders assess the potential for a supply disruption tied to increasing geopolitical risk,” Thummel added.

Though the attacks on shipping have boosted the risk premium, other analysts said impacts to oil supply are currently limited.

“For now the impact is limited as oil keeps flowing, just with longer journeys translating in higher transportation costs,” UBS analyst Giovanni Staunovo said.

Goldman Sachs analysts also said the disruption was unlikely to have a large effect on crude and liquefied natural gas (LNG) prices because opportunities to reroute vessels suggest production should not be directly affected.

Also in focus this week is the latest snapshot of U.S. supplies. The first of the week’s two supply reports from the American Petroleum Institute shows an increase in U.S. crude oil and fuel inventories, sources said. [API/S]

Analysts polled by Reuters expect to see a decline in U.S. crude oil inventories last week.

The U.S. Energy Information Administration (EIA) will publish official U.S. stocks data at 10:30 a.m. ET on Wednesday.

(Reporting by Shariq Khan; additional reporting by Alex Lawler, Andrew Hayley and Stephanie Kelly; editing by David Gregorio, Nick Zieminski and Diane Craft)