Oil headed for its first monthly gain since September as an escalation of attacks on ships in the Red Sea spurred a diversion of tanker traffic and raised fears about a wider conflict in the Middle East.

U.S. crude futures slipped on Wednesday, but are still up more than seven per cent in January. The market is also waiting for a U.S. response to a drone assault that killed American troops in Jordan over the weekend.

President Joe Biden said he has made a decision on how to respond, without elaborating, adding that Iran was responsible for providing the weaponry used in the strike. Tehran has denied involvement in the deadly attack and vowed to retaliate against any U.S. strike on its soil or assets abroad.

Crude traded in a narrow range for much of January, before breaking higher on the combined impact of sliding U.S. inventories, China’s efforts to stimulate its economy and the political risks in the Middle East.

Concerns remain about the outlook for consumption, particularly in China, the world’s largest crude importer, but for now that has been derailed by the spiraling tensions in the Middle East.

“China, at least for now, is an impediment to global oil demand growth, nonetheless, material supply issues will likely be the dominant force in shaping oil prices in the immediate future,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd.

Traders are also keeping a close eye on fuel markets, which have been most impacted by the disruption in the Middle East. A host of refinery outages and maintenance in Europe have also led to volatility in European diesel futures.

Later on Wednesday, the U.S. will report weekly inventory data. On Tuesday, the American Petroleum Institute said U.S. crude stockpiles fell 2.49 million barrels last week.

Prices:

• Brent for March settlement, which expires on Wednesday, fell one per cent to US$82.02 at 9:50 a.m. in London. The more-active April contract dipped one per cent
• WTI for March delivery slipped one per cent to $77.02 a barrel