Oil edges higher as US attacks on Houthis ratchet up tensions in Red Sea

Oil climbed as the US vowed more strikes against Iran's forces and proxies while the Houthis promised to retaliate against bombardments over the weekend.

Brent crude pared an earlier advance of as much as 1.2% to trade near $78 a barrel, after losing 7.4% last week in its biggest weekly drop since October, while West Texas Intermediate was under $73. American forces launched attacks against the Houthis over the weekend, and earlier hit Iranian troops and militias in Syria and Iraq.

The weekend's bombardments marked the biggest targeting of the Houthis since an initial operation on Jan. 11 as part of an effort to end attacks on commercial ships in the Red Sea. Despite the warning of further strikes, senior US officials said the country wouldn't be pulled into a prolonged regional conflict. A stronger dollar is also making oil more expensive for many investors.

Crude slumped last week — erasing almost all of this year's gains — amid talks to pause the four-month Israel-Hamas conflict, although US National Security Advisor Jake Sullivan said on Sunday that an agreement isn't imminent. There are also signs of robust supply as OPEC output remains above the collective limit and the US produces record amounts.

"Given the US military strikes avoid directly attacking Iran, we think the Israel‑Hamas cease-fire talks will have the more dominant effect," said Vivek Dhar, an analyst at Commonwealth Bank of Australia. "This will keep Brent oil futures under $80 a barrel as markets pay more attention to oversupply risks in coming quarters."

Elsewhere, a sizable amount of refining capacity is likely to be offline after a fire at the Lukoil PJSC facility in Volgograd over the weekend, blamed on a downed drone from Ukraine. Diesel futures jumped as much as 1.8% on Monday, the most in a week.

Disclaimer: This article first appeared on Bloomberg, and is published by a special syndication arrangement.