Oil prices have risen sharply after Iran rejected calls to end support for attacks by Houthi rebels on vessels in the Red Sea and sent a warship to the key trading route.
In the first trading session of the new year, Brent crude rose $1.73, or more than 2%, to $78.77 a barrel on Tuesday, while US West Texas Intermediate crude was at $73.36 a barrel, up $1.71, or 2.4%.
Prices were driven higher by fears of supply disruption amid the tensions in the Red Sea, which leads to the Suez Canal.
Some shipping companies have paused sailings on the route in favour of the longer trip around the tip of Africa. Rerouting the vessels adds expense and up to 20 days to deliveries for shipping companies.
On Tuesday, Germany’s Hapag-Lloyd, which had a ship attacked near Yemen last month, said it would continue to divert its vessels away from the Suez Canal and around the Cape of Good Hope until at least 9 January for security reasons. Other companies are expected to follow suit.
As of 29 December, 166 vessels had been rerouted and 28 heading for the Suez Canal were paused, according to the supply chain advisory group Project 44. It said daily traffic volumes in the canal were on average 55% lower than before the attacks.
Oil prices were also supported by hopes of strong demand over China’s spring festival holidays in February and economic stimulus in the country, which is the top importer of crude.
A Reuters survey of economists and analysts predicted that the average price of Brent crude would be $82.56 a barrel this year, compared with the 2023 average of $82.17, as they expect global tensions to remain but demand to be capped by weak global growth.
The rise in the wholesale cost of oil could ultimately push up prices for UK drivers at the pump.
Iran state media reported that the Alborz destroyer crossed the Bab-el-Mandeb strait and entered the Red Sea on Monday but did not specify its mission except to say that it periodically conducted operations in the Red Sea in order to secure shipping routes.
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The move comes as the UK is reportedly considering airstrikes on Houthi rebels and the US said its navy sank three boats that had been targeting a container ship in the Red Sea.
The US said its helicopters had fired at four boats from Houthi-controlled areas in Yemen that had attacked a commercial vessel owned by the shipping company Maersk. On Sunday, Maersk said its crew was safe and it would pause all shipping in the Red Sea for 48 hours.
The incident was the latest of nearly 20 attacks that have led some shipping companies to abandon the Red Sea route altogether.
This month a Royal Navy destroyer joined international efforts to deter attacks on cargo ships in the Red Sea. HMS Diamond joined American and French warships in a US-led taskforce called Operation Prosperity Guardian.
