DTN Oil

WASHINGTON (DTN) -- Erasing overnight gains, West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange stalled near two-month highs Monday morning after a weekend attack on a U.S. military base in northeast Jordan killed three U.S. service men and left dozens injured in a clear escalation of ongoing tensions across the Middle East. Additionally, Houthi militias struck an oil tanker carrying Russian fuel through the Gulf of Aden this weekend, forcing markets to reprice the risk of safe passage for Russian barrels through the Red Sea.

Both WTI and Brent jumped 1.5% in Asian trading following Sunday's attack on U.S. military outpost Tower 22, located on the border between Jordan and Syria. The deadly attack marked the first time U.S. troops have been killed in the Middle East since the beginning of the war in Gaza. Pentagon officials have since said the drone was fired by one of the Iran-backed militias in Syria, but it is still being determined which militia group specifically is responsible. President Biden on Sunday vowed to hold those responsible for the attack accountable, saying that while facts are still being gathered, "We know it was carried out by radical Iran-backed militant groups operating in Syria and Iraq." For his part, Iran's Foreign Minister Nasser Kanaani denied Tehran's involvement in Sunday's attack, saying, "The regional resistance groups do not take orders from Iran," according to state news agency IRNA. Iran has either backed or sponsored over a dozen militia groups operating throughout the Middle East, including in Iraq, Syria, and Yemen.

Oil futures have since erased overnight gains as investors assessed the degree of Iran's involvement in the attack on the U.S. outpost and a potential response from the Biden Administration.

For the oil markets, a direct attack on a Russian oil tanker passing through the Gulf of Aden this weekend could have a more meaningful impact as it casts a shadow on safe passage for some 1.7 million barrels of Russian crude oil flowing through the Red Sea each day. So far, Russian oil flows have been unaffected by the ongoing conflict but that can change any moment as violence escalates.

Near 7:45 a.m. EST, front-month Brent for March delivery on ICE traded at $83.51 barrel (bbl) after spiking to $84.80 bbl overnight. West Texas Intermediate futures for March delivery were little changed near $77.97 bbl. NYMEX February ULSD futures slipped $0.0062 to $2.8372 gallon and February RBOB futures declined $0.0150 to $2.2791 gallon.

Limiting upside for the oil complex, the U.S. dollar strengthened 0.11% against the basket of foreign currencies to trade near 103.345 as investors digested the latest round of inflation data in the United States. The Personal Income and Outlays report -- a preferred inflation measure by the Federal Reserve, rose 2.6% in the 12 months ending in December, matching the annual increase in November. But the core PCE index dropped by a much steeper margin to 2.9% from November's 3.2% annual gain. This marked the lowest reading since before the pandemic. Interestingly, the retreat in inflation happened even as the personal consumption index surged 0.7% -- a much larger gain than expected by markets. Meanwhile, U.S. gross domestic product increased by a solid 3.3% during the final three months of 2023, well above the average growth rate of 2.3% from 2015-2019.

Stronger-than-expected macroeconomic data again prompted repricing rate cuts this year, with investors almost equally split over the odds for the first rate cut in March. The Federal Open Market Committee will hold its first policy meeting of 2024 on Jan. 31.

Liubov Georges can be reached at liubov.georges@dtn.com