Oil prices finish higher as traders weighs risks tied to U.S. airstrikes

By Myra P. Saefong and William Watts

Signs of weakness in China's economy fuel worries about demand

Oil futures ended higher Monday, perking up after last week's steep decline, as traders weighed support from risks to supplies after a series of retaliatory strikes on Iran-backed militants this weekend by a coalition led by the U.S. and U.K.

Some analysts, however, said the markets remain unconvinced that conflict in the Middle East will expand in a way that threatens crude supplies, while traders are also keeping an eye on Chinese economic data amid concerns over the outlook for global crude demand.

Price moves

West Texas Intermediate crude for March delivery CL00 CL.1 CLH24 rose 50 cents, or 0.7%, to settle at $72.78 a barrel on the New York Mercantile Exchange. April Brent crude BRN00 BRNJ24, the global benchmark, climbed by 66 cents, or nearly 0.9%, at $77.99 a barrel on ICE Futures Europe.March gasoline RBH24 tacked on 2.9% to $2.21 a gallon, while March heating oil HOH24 added 2.4% to $2.72 a gallon.Natural gas for March delivery NGH24 settled at $2.08 per million British thermal units, up 0.1%.

Market drivers

The U.S. warned Iran and Iranian-backed militias on Sunday that it will conduct more attacks if American forces in the Middle East continue to be targeted. At the same time, the U.S. has said it does not want an "open-ended military campaign" across the region.

"The bigger fear is a wider conflict, or Iran getting involved, which could seriously impact crude-oil supply through the Strait of Hormuz," Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch.

Still, WTI dropped 7.4% and Brent lost 6.8% last week, with both grades finishing at three-week lows on Friday. Pressure was attributed in part to news reports indicating progress toward a ceasefire deal between Israel and Hamas.

The U.S. carried out strikes on dozens of Iranian paramilitaries and Tehran-backed militias late Friday in response to a drone attack that killed three U.S. service members in Jordan the previous weekend. The U.S. and U.K. also carried out strikes against Iran-backed Houthi militants in Yemen who have targeted shipping vessels in the Red Sea with drone and missile attacks, resulting in a spike in shipping rates.

"While developments in the Red Sea are having an impact on some physical markets, on the whole, oil supply remains unaffected," Ewa Manthey and Warren Patterson, strategists at ING, said in a note.

"Furthermore, the oil market is largely balanced in [the first quarter of 2024] and OPEC is sitting on a large amount of spare capacity, leaving the market fairly comfortable," they wrote. "However, this could quickly change if tensions spread to other parts of the Middle East."

In China, the Caixin/S&P Global services purchasing managers' index for January fell to 52.7 from 52.9, according to news reports, remaining in expansion territory above 50.

"The absence of sufficiently positive data from China and the United States' fear of an expansion of the ongoing wars that may threaten the interests of the current administration may put more pressure on oil markets," Samer Hasn, market analyst at XS, said in emailed commentary.

Meanwhile, data released on Friday showed a greater-than-expected 353,000 rise in new U.S. jobs in January.

Oil prices had declined early Monday against that backdrop. Signs of persistent economic strength will make it difficult for the Federal Reserve to start cutting U.S. interest rates, StoneX's Kansas City energy team, led by Alex Hodes, said in a Monday note. That provided support for the U.S. dollar DXY, which can pressure prices for dollar-denominated commodities such as oil.

A reading Monday of U.S. business conditions at service-oriented companies was also upbeat, with the Institute for Supply Management's survey climbing to 53.5% in January from 50.5% in the prior month.

The oil market has "seemed skeptical of the potentially positive demand implications of the recent string of strong economic data," though prices did move up in the wake of the better-than-expected ISM report, Tyler Richey, co-editor of Sevens Report Research, told MarketWatch.

As far as what to watch for this week, Richey said a rise in consumer demand for refined products metrics in the weekly Energy Information Administration report due out Wednesday would be a bullish development, while a return to record U.S. oil output would be "negative for prices in the near term."

The Associated Press contributed to this report.

-Myra P. Saefong -William Watts

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02-05-24 1501ET

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