Oil prices fall as traders monitor rising tensions in Red Sea

Oil prices fell Tuesday as traders monitored rising tensions in the Red Sea amid a backdrop of record U.S. crude production and worries about demand in China.

The West Texas Intermediate contract for February lost $1.27, or 1.77%, to settle at $70.38 a barrel. The Brent contract for March shed $1.15, or 1.49%, to trade at $75.89. 

Crude prices had jumped more than 2% earlier in the trading session on escalating tensions in the Red Sea, a crucial global trade chokepoint. 

Helima Croft, head of global commodity strategy at RBC Capital Markets, said oil prices do not reflect the increase in tensions because traders are not convinced that a major supply disruption is on the horizon.

“The market is basically saying ‘we will wait and see until something happens,'” Croft told CNBC on Tuesday. “But it’s really getting much more serious every day,” she said of tensions in the region.

Traders are more focused on the macroeconomic backdrop of record U.S. production and faltering demand in China, said Adi Imsirovic, a veteran oil trader who is now an energy security expert at the Center for Strategic and International Studies.

Danish shipping giant Maersk said Tuesday it will pause shipping through the Red Sea until further notice after one of its vessels came under attack by militants over the weekend.

And Iran on Monday deployed a destroyer to the Red Sea, according to the country’s Tansim news agency. The report did not elaborate on the details of the warship’s mission, but said Supreme Leader Ayatollah Ali Khamenei stressed the need to maintain a presence in international waters. 

The move by Tehran comes after U.S. Navy helicopters destroyed three boats of Iran-backed Houthi rebels. The Navy was responding to a distress call by Singapore-flagged vessel Maersk Hangzhou which had come under Houthi fire, the U.S. Central Command said in a statement.

In a statement by a rebel spokesman on Sunday, the Houthi group maintained that the boats were engaged in “official duties to secure maritime routes”, a news channel owned by the rebels stated. 

“Any escalation of conflict in this region is certainly going to add more of a risk premium on Brent,” Bernstein’s Senior Energy Analyst Neil Beveridge 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 really doesn’t lead to any escalation, then I don’t really 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.

The U.S. has launched a multinational maritime force, Operation Prosperity Guardian, in an effort to protect trade in the key waterway.