Oil up 1% as Middle East tensions offset US inflation worries

By Scott DiSavino

NEW YORK (Reuters) - Oil prices gained about 1% on Thursday after Iran seized an oil tanker off the coast of Oman, raising the prospect of escalating conflict in the Middle East.

Brent futures rose 61 cents, or 0.8%, to settle at $77.41 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 65 cents, or 0.9%, to settle at $72.02.

Earlier in the session, both benchmarks were up over $2 a barrel but have pulled back on an unexpected increase in U.S. inflation and reports China was seeking fewer Saudi imports.

U.S. diesel and gasoline futures led energy markets higher with diesel, which is also used as a heating fuel, gaining about 3% to a three-week high on forecasts for extreme cold across much of the U.S. next week.

"The best kind of rally in the crude oil space is one that is led by the products ... as long as the refiner needs to make more product, he is going to need to buy more crude oil," said Bob Yawger, director of energy futures at Mizuho Bank.

In the Middle East, Iran seized a tanker with Iraqi crude destined for Turkey in retaliation for the confiscation last year of the same vessel and its oil by the U.S.

The seizure of the Marshall Islands-flagged St. Nikolas coincides with weeks of attacks by Yemen's Iran-backed Houthi militias targeting Red Sea shipping routes.

Yemen-based Houthis this week mounted their largest attack yet on commercial shipping lanes in the Red Sea.

The U.S. and Britain hinted they would take further measures if the attacks continued. The U.N. Security Council passed a resolution demanding an immediate end to the Houthi strikes.

The group's leader, Abdel-Malek al-Houthi, said any attack on the Houthis would not go without a response, noting any such response would be bigger than the recent strike in which its drones and missiles targeted a U.S. ship in the Red Sea.

Israel, meanwhile, faced down accusations at the World Court of genocide in its war in Gaza, as the first residents returned to scenes of total devastation in the north of the enclave where Israeli forces began withdrawing this week.

Global trade declined by 1.3% from November to December 2023 as militant attacks on merchant vessels in the Red Sea led to a plunge in the volumes of cargo transported in the region.

"Slowing demand, unrest in Middle East and muted price reaction have producers, consumers and market participants alike feeling paranoid about oil prices," Barclays said as the bank lowered its 2024 Brent forecast by $8 to $85 a barrel.

BEARISH FACTORS WEIGHING ON CRUDE

Oil prices were up even though U.S. data showed consumer inflation rose 3.4% in December on a yearly basis versus a 3.2% increase expected by economists polled by Reuters.

The higher-than-expected rise in inflation could delay a much anticipated interest rate cut in March from the U.S. Federal Reserve.

"Given that markets have continued to price in rate cuts in March, a delay of the currently anticipated timeline would dampen investor sentiment, likely bringing (crude) price declines with it," analysts at energy consulting firm Gelber and Associates said.

Lower interest rates would reduce consumer borrowing costs, which could boost economic growth and demand for oil.

Refiners in China, the world's top oil importer, asked for less Saudi crude oil in February even though Saudi Arabia, the world's top oil exporter, announced its biggest price cut in 13 months.

Looking ahead, China's customs administration will release December trade data on Friday, giving a full-year picture of overall demand.

In other news, China and Taiwan's largest opposition party, the Kuomintang, said Taiwan's ruling party presidential candidate Lai Ching-te could pose a risk to peace if he wins this weekend's election.

(Reporting by Scott DiSavino in New York, Ahmad Ghaddar in London, Colleen Howe in Beijing and Jeslyn Lerh in Singapore; Editing by Nick Macfie, Nick Zieminski and Jonathan Oatis)