Oil Drops as Risk-Off Tone Drowns Out Impact of Mideast Crisis

(Bloomberg) -- Oil fell as a broad risk-off tone across markets coupled with a stronger US dollar offset concerns over Middle East tensions, including continued attacks on ships in the Red Sea by Iran-backed Houthi rebels.

Benchmark Brent was below $78 a barrel after ending narrowly higher on Tuesday, with West Texas Intermediate near $72. In Asia, China reported mixed economic data that highlighted the lack of a recovery in the key crude importer. On currency markets, the US dollar held gains after its biggest one-day jump since March last year as traders recalibrated expectations for when the Federal Reserve will start cutting interest rates. That hurt commodities. 

Tensions in the Middle East, meanwhile, remain front and center. Houthi militants in Yemen are still threatening shipping in the waterway off their coast despite US-led strikes. There’s concern the Israel-Hamas war will spread beyond Gaza, potentially drawing in Iran directly, with Tehran firing missiles this week at what it said was an Israeli spy base in Iraq.

In another sign of fallout from the standoff, some insurers are starting to avoid covering US and UK ships against war risks when they navigate the southern Red Sea. Many oil and gas carriers are now avoiding the waterway, forcing them to take a longer route around southern Africa.

Oil’s been confined to a narrow range since the start of the year, as the Middle East crisis hasn’t so far led to a direct hit to production. Traders will get dual insights into the outlook later Wednesday as the Organization of the Petroleum Exporting Countries releases its monthly market assessment, and a US industry group issues estimates for crude stockpiles.

“The good news, and the likely reason why oil benchmarks have not surged, is that global oil supply from the attacks in the Red Sea have not been affected,” said Vivek Dhar, an analyst at Commonwealth Bank of Australia. “The bad news is that the alternative route around Africa takes 14 days longer.”

Broader financial markets including stocks fell after Wednesday’s data from Beijing, which showed that retail sales missed forecasts and property investments continued to struggle. Crude eased along with copper and other industrial commodities.

In the US, freezing temperatures have curbed refinery operations in the processing hub of Texas and shut in more than half of North Dakota’s oil production. As much as 650,000 barrels a day is offline, up from 425,000 barrels on Monday, the North Dakota Pipeline Authority said.

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