Oil Futures Up on Middle East Concerns

WASHINGTON (DTN) -- Nearest delivered New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled higher on Tuesday, reversing Monday losses after Saudi Arabia reported a second attack on its oil infrastructure, while investors weighed the impact of an escalating trade war between the United States and China.

ICE July Brent shifted $1.01 higher to settle at $71.24 per barrel (bbl), widening its premium to West Texas Intermediate futures to a $9.46 bbl two-month high. NYMEX June WTI futures settled up $0.74 at $61.78 bbl. In refined products, NYMEX June RBOB futures settled 1.3 cents higher at $1.9767 gallon, with the June ULSD contract was up 2.05 cents to settle at $2.0589 gallon.

International Brent crude jumped 1.3% on Tuesday after a major oil pipeline in Saudi Arabia was struck by armed drones and temporarily shut down. Saudi Energy Minister said two oil pumping stations in the East-West pipeline, which transports oil from fields in the eastern region to the port of Yanbu on the western coast were hit by explosives. Saudi official called the incident "an act of terrorism," which marked the second attack on Saudi oil infrastructure in just 48 hours.

Houthi rebel group in neighboring Yemen reportedly claimed responsibility for the attack. Houthi rebels have long received support from Iran in their fight with Saudi Arabia, amplifying tensions in the region. Antagonism between the United States and Iran intensified this month after U.S. President Donald Trump ended exceptions to sanctions on Iranian oil sales.

Organization of the Petroleum Exporting Countries pumped 30.031 million barrels per day (bpd) in April, holding output near a four-year low. Citing secondary sources, OPEC said Iranian crude oil production declined to 2.554 million bpd last month, while output from Saudi Arabia fell to 9.742 million bpd after a fifth consecutive monthly decline. Iraq, Nigeria and Libya all increased output in April, offsetting some of the steep declines from Saudi Arabia and Iran.

Oil futures were also supported Tuesday afternoon by a rally in equity markets, with Dow Jones Industrial Average climbing more than 200 points at the close, while S&P 500 advanced 0.8% on the session. Stocks regained some of the sharp losses from the previous session, as investors assessed the impact of the latest tariffs in the U.S.--China trade war.

Markets turned volatile after China retaliated against U.S. tariffs by imposing a 25% increase in import levies on $60 billion worth of U.S. imports to begin on June 1. On Monday, the DJIA and S&P 500 fell 617 points and 2.4%, respectively, the worst performance since early January. The tit-for-tat tariffs battle is threatening trade relationship between the world's two largest economies that are also each other's biggest partners, as nearly $700 billion in goods were traded between China and the United States in 2018 alone.

White House economic adviser Larry Kudlow said China invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to continue trade talks in Beijing.

WTI futures upside was capped by surging supplies from the seven tight oil basins in the United States. Energy Information Administration on Monday projected U.S. shale production would increase to 8.495 million bpd in June, up 83,000 bpd from May. Permian Basin is projected to add 56,000 bpd of new production to 4.173 million bpd in June, accounting for 68% of the growth in total U.S. shale output.

Liubov Georges can be reached at liubov.georges@dtn.com