Oil rally continues as an Iranian warship enters the Red Sea

Oil prices jumped again by more than 2% on Tuesday after an Iranian warship entering the Red Sea after U.S. helicopters sank three Houthi boats on Sunday.

Iran first announced the deployment of the Alborz destroyer through the strategic Bab al-Mandeb Strait on Monday, as reported by the Iranian state media.

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The details of the warship’s mission were not disclosed, but the statement mentioned that such maritime operations are normal and are carried out from time to time in the Red Sea in order to secure shipping routes.

However, the move comes after the U.S. Navy destroyed three out of four Houthi rebel boats on Sunday, killing ten organisation members as a result.

The Navy was responding to a distress call from the Singapore-flagged container vessel Maersk Hangzhou, which was being shot at by Houthi rebels, as stated by the U.S. Central Command.

A Houthi spokesperson then commented on Sunday on the rebel-owned news channel that the Houthi’s open fire on the Maersk Hangzhou vessel was in line with the group’s “official duties to secure maritime routes.”

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In light of the Sunday attack, the Danish shipping company Maersk stated that it will announce later on Tuesday whether or not it will redirect its shipping route to around Africa.

As the tension continued to heighten on the news of an Iranian warship now patrolling the Red Sea, Brent Crude was up by 2.40%, while WTI Crude was up by 2.44% at the time of writing on Tuesday.

Since the first Houthi Red Sea-based attack back in December, more and more major oil companies have been diverting their shipping routes from the Red Sea to a safer passage around Africa.

Ship tracking data, released at the end of December, shows that at least four Europe-bound ships took a longer route around Africa in order to avoid crossing the Red Sea.

The route to Europe from India or the Middle East around Africa is not only approximately three weeks longer but is also much more expensive, with ocean freight rates surging to as much as $10,000 (£7,844) per container.

Therefore, a significant number of vessels continue to favour the Red Sea, with some taking an even riskier and shorter route through the Suez Canal.

Oil volatility

Despite the current rally, which was highlighted by benchmark crude Brent jumping up by more than 2.50% at the time of writing on Tuesday, oil has had a difficult December.

In the middle of the last month, the front-month WTI briefly fell below $68, hitting its lowest point since June 2023.

“It found support there and went on to break above $76 per barrel two weeks later. Prices have stabilised since, and where we go from here over the next week or so is likely to be significant in setting the path for oil in the first quarter of 2024,” said David Morrison, senior market analyst at Trade Nation.

However, in the final trading sessions before Christmas, oil prices experienced a significant retreat, causing many traders to speculate that the likelihood of a more substantial rally had diminished.

“If the current rally fades quickly, then a retest of support down to $67.50 is possible. If prices gain some upside momentum, then a rally could have legs given how far crude oil has fallen since the end of September,” said Morrison.

“Fundamentally, while supply continues to outstrip demand, the escalating hostilities in the Red Sea are raising concerns and providing support,” he added.

Looking into the future, a survey conducted by Reuters among economists and analysts forecasts that in 2024, the average for Brent crude will be around $82.56 per barrel.

This projection is slightly above the 2023 average of $82.17.

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