Oil prices rise nearly 2% on first trading day of 2024 on concerns over Red Sea supply

Crude futures recorded their biggest annual drop since 2020 last year as US oil production hit record

The Galaxy Leader cargo ship, boarded by Houthi rebels on November 19, is escorted by their boats in the Red Sea. Reuters

Oil prices rose on the first day of trading this year on fears of Red Sea supply disruptions and hopes of an improving demand outlook in China.

Brent, the benchmark for two thirds of the world's oil, was trading 2.14 per cent higher at $78.69 a barrel at 4.11pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 2.18 per cent at $73.21 a barrel.

Crude futures recorded their biggest annual drop since 2020 last year at a time of record US oil production and a slowdown in major economies.

On an annual basis, Brent ended 2023 more than 10 per cent lower, while WTI dropped by nearly 11 per cent.

On Sunday, the Yemeni Houthi rebel group launched three anti-ship missiles at a commercial vessel, the Maersk Hangzhou, a Singapore-flagged container ship.

One struck it, causing damage but no casualties, while two of the missiles were shot down by the destroyer USS Gravely.

The US said that a naval task force formed in December had shot down four ballistic missiles and 17 drones fired by the Iran-backed militia.

The Bab Al Mandeb, located at the southern edge of the Red Sea, is a route for oil tankers and vessels between the Arabian Gulf and Asia, as well as to Europe by way of the Suez Canal.

About 12 per cent of the seaborne oil trade and 8 per cent of liquefied natural gas passes through the strait.

Meanwhile, manufacturing activity in China, the world’s second-largest economy, fell for the third month in a row, raising expectations of stimulus measures to revive growth.

China’s official manufacturing purchasing managers' index (PMI) fell to 49 last month from 49.4 in November, the third consecutive month of a reading below the neutral 50 mark, and below consensus expectations of an improvement to 49.6.

The deterioration in the official manufacturing PMI stood in contrast to the Caixin manufacturing PMI reading, which rose above expectations, to 50.8 in December from 50.7 the month before.

Investors will closely follow data points to be released by the US this week.

The minutes of the December 13 Federal Reserve meeting will be out on Wednesday and could potentially shed light on the more “dovish” remarks made by Chairman Jerome Powell at the press conference last month, Jeanne Walters, senior economist at Emirates NBD, said.

The Fed left interest rates unchanged after 2023’s last policy meeting but indicated that it would cut rates more than once this year.

The central bank has raised interest rates by 525 basis points since March 2022 after an inflation surge in the US.

Higher interest rates could dampen economic growth, lowering crude demand.

The Labour Department will also release November job openings data on Wednesday, after openings fell in October to their lowest in two and a half years in a sign of a loosening labour market in the US.

Last week, the US Commerce Department’s Personal Consumption Expenditures report showed that inflation fell to 2.6 per cent in November from 2.9 per cent the month before.

Meanwhile, inflation in the UK fell to 3.9 per cent in November from 4.6 per cent in October, representing a bigger dip than predicted and the lowest figure in two years.

“It is no slam-dunk that global inflation will gradually ease to what many central banks have long contemplated, but typically it will be around the 2 per cent level,” said Gary Dugan, chief investment officer at Dalma Capital.

“Geopolitics could still spoil the game and push commodity prices higher. Although inflation pressure has abated, we suspect it may linger longer than the market's current price,” Mr Dugan said.