Oil jumped the most this year after
Iran said it shot down a
United States drone and
Donald Trump warned the
Persian Gulf nation it made “a very big mistake,” stoking tensions in the epicenter of global crude production.
Futures climbed as much as 6.1% in New York, after the drone downing, which came a week after two oil tankers were attacked in the region.
Iran shot down an American spy drone near the entrance to the Persian Gulf under disputed circumstances, escalating tensions in a region that’s been on the brink of a military confrontation for weeks.
“Iran made a very big mistake!” President Donald Trump said on Twitter Thursday morning.
Iranian media said the aircraft was hit inside Iranian airspace. The U.S. said the Global Hawk drone was flying in international airspace when it was shot down by an Iranian missile over the Strait of Hormuz, an oil choke point.
“Iranian reports that the aircraft was over Iran are false,” said Navy Captain Bill Urban, a spokesman for U.S. Central Command. “This was an unprovoked attack on a U.S. surveillance asset in international airspace.”
The downing of the drone fanned fears that a military clash between the U.S. and Iran is just a matter of time, stoking tension throughout the Gulf, which supplies one-third of the world’s oil. Iranian media said the aircraft was hit near Kuh Mobarak, on Iran’s southern coast.
“We will defend Iran’s airspace and maritime boundaries with all our might,” Ali Shamkhani, secretary for the Supreme National Security Council, was quoted as saying by state-run Iranian Students’ News Agency. “It doesn’t matter which country’s aircraft cross our airspace.”
Meanwhile, crude was also boosted by a rally for equities after the U.S. Federal Reserve signaled it’s ready to lower interest rates for the first time since 2008.
After slipping into a bear market earlier this month, U.S. oil futures have surged almost 10% over the last week, as America and Saudi Arabia blamed Iran for a series of attacks while the Trump administration tightens sanctions on Iranian crude. Word that Trump and Chinese President Xi Jinping are set to resume trade talks at the G-20 summit in Japan have also improved sentiments about global growth.
“The Iran conflict isn’t going away any time soon,” said Michael Hiley, head of over-the-counter energy trading at LPS Futures in New York. “If you combine that with Trump and Xi making nice -- they are at least saying the right things -- then that’s certainly going to prop up” the oil market.
West Texas Intermediate for July delivery, which expires Thursday, rose as high as $57.02 a barrel on the New York Mercantile Exchange, for its biggest intraday increase since Dec. 26. It was at $56.64 as of 11:23 a.m.
Brent for August settlement rose as much as 4.9%, the most since January, to $64.82 a barrel on London’s ICE Futures Europe Exchange. The global benchmark crude traded at a $7.27 premium to WTI for the same month.
Further boosting prices, U.S. crude inventories fell for the first time in three weeks through June 14, according to government data released Wednesday. The 3.1-million barrel decline was more than double the median analyst estimate. American oil production also dropped for a second week to 12.2 million barrels a day.
Speculative traders who’d turned against crude recently are ready to pile back in, said LPS’ Hiley. “Certainly there are some buying bullets out there; there’s some dry powder,” he said. “You can’t be short in this market.”
Trump is getting briefed on the shootdown Thursday in a meeting with National Security Advisor John Bolton, Secretary of State Michael Pompeo and Acting Defense Secretary Patrick Shanahan. The region has been volatile since Trump tightened sanctions on Iranian oil sales in early May, sent military reinforcements to the region and provoked an increasingly squeezed Iranian government to pull back on commitments under the 2015 deal that was meant to prevent it from developing a nuclear bomb.
Washington quit the accord a year ago and reimposed sanctions to try to force Iran to rein back regional proxy militias and its weapons programs.
Frictions flared further last week after an attack on two oil tankers outside the entrance to the Gulf. The U.S. blamed Iran, which has denied involvement. Iran on Monday warned European nations that it would breach the multilateral nuclear accord, which had traded some sanctions relief for limits on Tehran’s nuclear program, as soon as June 27 unless they find a way to circumvent U.S. penalties.
“We are seeing an escalation and the frequency of attacks is concerning even though they are still mostly minor,’’ said Renad Mansour, a research fellow in the Middle East and North Africa program at Chatham House. “People across the region are starting to make preparation for the possibility of a trigger coming from somewhere.’’
The tensions come with the Pentagon’s leadership in flux. Acting Secretary Patrick Shanahan is scheduled to hand over responsibility for the Defense Department to Army Secretary Mark Esper on Sunday night. It’s not clear if Esper will be Trump’s pick to permanently lead the Pentagon, which is approaching its seventh month without a confirmed secretary in charge.
On Thursday, former Vice President Joe Biden, front-runner in the Democratic presidential race, said Trump’s Iran strategy is a “self-inflicted disaster” and blamed the stepped up hostilities on U.S. withdrawal from the nuclear accord.
Attacks on regional oil infrastructure since mid-May have helped whipsaw oil prices. A measure of price volatility for the benchmark U.S. crude grade reached a five-month high on Monday, pulled between the threat of disrupted supply and mounting concern that trade wars will weaken demand.
The drone downing followed a missile strike by Iranian-backed Yemeni rebels overnight on Saudi Arabia. President Donald Trump was briefed and was “closely monitoring the situation,” White House Press Secretary Sarah Huckabee Sanders said on Wednesday night, without providing details of the incident.
A news agency operated by Iran-backed Houthi rebels in Yemen said that they had hit a power station in Jazan, on the southwestern coast of Saudi Arabia, with a cruise missile. The official Saudi Press Agency later said a projectile fired from Yemen had fallen near a desalination plant causing no damage or casualties.
Saudi Aramco said all of its facilities are “fully operational”.