Oil prices end higher as traders monitor Middle East, Russian output and China

“While escalation cannot be written off, it remains unlikely in our view, as main parties in the conflict have strong incentives to avoid direct confrontation, and so far they have acted accordingly,” they said.

Oil futures had fallen by more than 1% Monday, pulling back from their highest levels since November, as worries over China’s economy and other concerns around the demand outlook sparked pressure.

The downside for oil, however, remains limited though due to concerns around a potential intensification of fighting in the Middle East that could threaten crude flows.

“In energy, crude oil remains upbeat after last week’s positive price breakout above the $75 [a barrel] and the rising tensions in the Red Sea region as everyone is now expecting the U.S. response to the latest attacks,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a Tuesday note.

WTI saw resistance near the $80-a-barrel level on Monday, and could see consolidation between $78 and $80 a barrel before a potential breakout back above $80, she said.

Meanwhile, “drone attacks on refiners in Russia pose a new, less appreciated, but potentially more damaging threat to global oil product balances,” said analysts at J.P. Morgan. “Since the start of the year, there have been five recorded Ukraine-linked drone attacks on Russian energy infrastructure.”

Stephen Innes, managing partner at SPI Asset Management, said he also believes the direct attack on a Russian oil tanker in the Gulf of Aden carries more significance for oil markets, so far, than a terrorist attack on a U.S. military outpost.

Particularly concerning is the “safe passage of approximately 1.7 million barrels of Russian crude oil traversing the Red Sea daily,” he told MarketWatch.

For now, many “scary things are happening in the Middle East,” but oil production “impairment or major supply disruptions isn’t one of them,” said Innes.

Read: Oil prices fall despite ‘grave escalation’ of Middle East crisis. Here’s why.

Over in Saudi Arabia, state producer Saudi Aramco on Tuesday said it won’t try to boost its maximum daily oil production to 13 million barrels a day after receiving an order from the country’s energy ministry. The company, formally known as the Saudi Arabian Oil Co.
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said it would maintain maximum output at 12 million barrels a day.

The Saudi output-capacity expansion plans had seemed “at odds with a recently restrictive production policy” that has seen Saudi Arabia cut oil output to 9 million barrels a day, said analysts at Macquarie in a Tuesday note.

On its face, the decision may give Saudi Arabia “a bit more freedom to maintain a restrictive output policy” beyond the first quarter of this year, they said.

Weekly data on U.S. petroleum production will be released by the Energy Information Administration on Wednesday.

Analysts polled by S&P Global Commodity Insights forecast declines of 2.3 million barrels in domestic commercial-crude supplies for the week ended Jan. 26, along with inventory decreases of 450,000 barrels for gasoline and 700,000 barrels for distillates.