Oil prices move lower as U.S. dollar strengthens, but Middle East tensions limit losses

Oil futures moved lower on Tuesday, pressured by strength in the U.S. dollar, but continued tensions in the Middle East that have disrupted tanker traffic and threated oil supplies in the region kept price losses in check.

Price action

  • West Texas Intermediate crude


    for February delivery fell 32 cents, or 0.4%, to $72.36 a barrel on the New York Mercantile Exchange. Nymex WTI futures didn’t settle Monday due to the Martin Luther King Jr. Day holiday.

  • March Brent crude

    the global benchmark, was down 8 cents, or 0.1%, at $78.07 a barrel on ICE Futures Europe, after falling 0.2% on Monday.

  • February gasoline
    added 1.2% to $2.1459 a gallon, while February heating oil
    climbed by 1.2% to $2.7003 a gallon.

  • Natural gas for February delivery
    traded at $2.921 per million British thermal units, down 11.8%.

Market drivers

The weakness in oil prices Tuesday is likely to be “short lived, as the situation in the Red Sea seems to be quite unstable,” Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch. For now, the U.S. dollar is contributing to weakness in oil, he said.

The ICE U.S. Dollar index
was up 0.9% at 103.288 in Tuesday dealings. Strength in the dollar can make dollar-priced oil more expensive to overseas buyers.

U.S. inflation figures and the escalation of military actions in the Red Sea appear to have contributed to “reshaping market expectations of the interest rate path on the both sides of the Atlantic,” Samer Hasn, market analyst at XS.com, said in emailed commentary. “This, in turn, was reflected in further rises in Treasury bond yields since last Friday and restored some strength to the U.S. dollar.”

Meanwhile, Iran-backed Houthi militants operating out of Yemen on Monday vowed to continue attacking U.S. and international targets in the Red Sea in response to Israel’s operations in Gaza, news reports said. U.S. Central Command said a Houthi missile struck the Gibraltar Eagle, a U.S. bulk carrier, on Monday without causing significant injury or damage.

Oil futures rose Friday in the wake of an assault by U.S. and U.K. forces on Houthi militants, but finished well off session highs and booked weekly losses. Meanwhile, data shows tanker traffic through the Red Sea and the Bab el-Mandeb waterway, a crucial chokepoint, has fallen off significantly.

Crude had found some support around incidents in the Red Sea and near the Strait of Hormuz, but has struggled to build a geopolitical risk premium since the start of the Israel-Hamas war in October. Shipping woes have been seen as a boost for U.S. crude exports.

Read:Why Red Sea chaos is driving oil buyers ‘into the arms of U.S. shale producers’

“For commodity markets, the increased tension poses supply risks, with energy markets most vulnerable. However, for oil and LNG (liquefied natural gas), we are not seeing any fundamental impact on supply yet,” Ewa Manthey and Warren Patterson, analysts at ING, said in a note.

“Refiners and consumers could initially face some tightness as supply chains adjust to the longer route. Given the uncertainty and the risk of a spillover, oil prices are likely to remain relatively well supported,” they wrote. “In order to see oil prices breaking significantly higher, we will need to see even further escalation and/or a meaningful loss in oil supply.”

In the U.S., prices for natural gas traded sharply lower even as wintry weather gripped many parts of the U.S.

The natural-gas market has seen some profit-taking, but Tyche Capital Advisors’ Zahir said he sees a “buying opportunity.”

“If we see more of the recent freeze across that the country has seen in the weeks to come, we could see supplies come down rather fast,” he told MarketWatch. It will definitely be weather-related in the weeks ahead and “will be volatile.”

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