Oil prices finish higher after deadly blasts in Iran

Traders, however, have largely looked past shipping disruptions in the Red Sea and the threat of a wider war in the Middle East over the past few weeks as those factors have yet to impact global oil supply and output, analysts said.

Price action

• West Texas Intermediate crude for February delivery
  CL00,
  -1.27%

  CL.1,
  -1.27%

  CLG24,
  -1.27%
  climbed $2.32, or 3.3%, to settle at $72.70 a barrel on the New York Mercantile Exchange.

• March Brent crude
  BRN00,
  +0.01%

  BRNH24,
  +0.01%,
  the global benchmark, gained $2.36, or 3.1%, to $78.25 a barrel on ICE Futures Europe.

• February gasoline
  RBG24,
  -0.28%
  added 3% to $2.16 a gallon, while February heating oil
  HOG24,
  -1.72%
  tacked on 3.1% to $2.60 a gallon.

• Natural gas for February delivery
  NGG24,
  -4.98%
  settled at $2.67 per million British thermal units, up 3.9%.

Market drivers

The explosions in Iran occurred near a cemetery where a ceremony was being held to mark the anniversary of the death of Maj. Gen. Qassem Soleimani in 2020, according to reports citing state media. Soleimani died in a U.S. drone strike in Iraq in January 2020.

Brent and WTI both ended Tuesday at their lowest since Dec. 13, failing to hold on to sharp, early gains that came in reaction to Iran’s decision to dispatch a warship to the Red Sea after the U.S. military over the weekend sank three boats operated by Iran-backed Houthi rebels. The boats had attacked a Maersk-operated cargo ship.

Read: Here’s what’s been keeping a lid on oil prices despite risks of a wider war in the Middle East 

Late Tuesday, the Danish shipping giant
MAERSK.A,
-1.93%

MAERSK.B,
-2.00%
said it would indefinitely suspend shipments through the Red Sea.

The Houthis have carried out numerous drone and missile attacks on shipping in the Red Sea since the start of the Israel-Hamas war in October, but oil traders have largely brushed off the potential threat to transportation through the crucial waterway.

Analysts have warned, however, that potential flashpoints could lead to a broader conflict directly involving Iran.

See: These 3 flashpoints could spark a wider Middle East war that markets can’t ignore

Meanwhile, news reports said Libya’s Sharara oilfield, which produces 300,000 barrels a day of crude, had been shut down by protesters.

Overall, the oil market seems “likely to be in rough balance, but uncertainty about supplies abound — from sanctions on Iran, Russia and Venezuela having less effect, to the possibility that [U.S. President Joe] Biden will try to tighten them,” said Michael Lynch, president of Strategic Energy & Economic Research.

Stories about higher U.S. interest rates beginning to bite in the construction industry, such as home building and sales, are leading to worries about oil demand, he told MarketWatch. Compounding those concerns is the fact that “high travel during the holidays hasn’t had a bigger impact on oil demand.”

Meanwhile, Angola quitting the Organization of the Petroleum Exporting Countries as a member is raising concerns that the “group might be having increasing trouble maintaining prices,” said Lynch. “The Saudis are carrying most of the burden and that might get old.”

And the most recent “popular” news on oil is the “boom in the U.S. shale fields, which outstripped expectations,” he said. “Looks like U.S. shale oil grew by about twice what was projected at the beginning of the year, and consolidation could see more rigs operating as economies free up capital.”

On Thursday, the Energy Information Administration will release its weekly U.S. petroleum supply report — a day later than usual due to Monday’s New Year’s holiday.

On average, analysts polled by S&P Global Commodity Insights expect the government agency to report a domestic crude inventory decline for the week ended Dec. 29 of 4 million barrels. They also forecast supply gains of 2.32 million barrels for gasoline and 2.6 million barrels for distillates.