Oil prices rose Tuesday after the International Monetary Fund boosted its global growth forecast for the year and as the market waited to see how the U.S. will respond to a deadly drone attack on its forces in the Middle East
The West Texas Intermediate contract for March gained $1.04, or 1.35%, to settle at $77.82 a barrel. The Brent contract for March rose 47 cents, 0.57%, to settle at $82.87.
WTI and Brent are up 8.6% and 7.5% respectively this year.
The International Monetary Fund on Tuesday raised its forecast for the global economy on unexpectedly strong growth in the U.S. and stimulus in China. The IMF forecast growth of 3.1% this year, an increase of 0.2 percentage points from its October projection.
The two benchmarks were down more than 1% earlier in the session after Saudi Aramco paused plans to raise its crude production capacity to 13 million barrels per day, raising questions about the future supply and demand picture.
Hamas also said it was studying a proposal to pause fighting in Gaza, in a sign that diplomacy to de-escalate the war might be gaining some traction.
Oil prices had settled down more than 1% on Monday as China's real estate crisis raised worries about demand in the world's second-largest economy.
"The ramifications of a possible collapse in the China's property sector makes moot any authority stimulus and will have very negative global shockwaves," John Evans with the oil broker PVM wrote in a note.
Middle East escalation
Traders are also monitoring how the U.S. will respond to a drone strike that killed three of its troops in Jordan Sunday. President Joe Biden held Iran-allied militants in Syria and Iraq responsible for the attack.
Biden said the U.S. would hold those "responsible to account at a time and in a manner our choosing." Defense Secretary Lloyd Austin said the Biden administration "will take all necessary actions to defend the United States, our troops, and our interests."
Yet National Security Council spokesperson John Kirby seemed to play down the possibility of a direct confrontation between Iran and the U.S.
"We're not looking for a war with Iran," Kirby told reporters at the White House Monday. "We're not looking to escalate the tensions any more than they already have been escalating."
Iran has denied any involvement in the attack.
Retired U.S. Navy Admiral James Stavridis, former NATO Supreme Allied Commander, said surgical strikes are not deterring Iran-allied militants. The Biden administration will likely launch a broader campaign that falls short of a full-blown war, Stavridis said.
"You're going to see a week or two of heavy attacks, but not in Iran itself, against Iranian proxies," Stavridis, global affairs vice chair at the Carlyle Group, told CNBC's "Squawk Box" Tuesday.
"Probably Iraq, Syria and Yemen would be the three places you're going to see the administration lean in over the next week or two," Stavridis said. Â
The oil market's response to geopolitical tensions in the Middle East has been muted, though analysts say a conflict between Washington and Tehran is a scenario that would likely send prices higher.
Stavridis said the death of three U.S. service members has raised the odds of a broader conflict, though he noted that neither Washington nor Tehran want a wider war.
"The spreading conflict in the Middle East remains the most visible and growing risk for energy markets," Natasha Kaneva, head of global commodities research at JPMorgan, told clients in a research note Tuesday.
"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," Kaneva wrote.
White House energy security advisor Amos Hochstein said disruptions to shipping in the Red Sea due to attacks by Iran-allied Houthi militants are "entirely manageable." An oil tanker was hit by a Houthi missile in the Gulf of Aden on Friday in the latest escalation.
"It's just a matter of re-routing the cargos and the tankers but not really affecting oil prices or any of the other commodities and other cargo shipping," Hochstein told "Squawk on the Street" Tuesday.
There has been a huge increase in crude supply from the U.S., Brazil and Guyana while global demand is largely holding steady, he said.
"At the end of the day, the fundamentals are that demand and supply are well balanced," Hochstein said.