Oil Futures Spike After Drone Downing

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled at their highest valuations since late May, as the early morning downing of a U.S. military drone in the Persian Gulf by Iran increased the geopolitical risk premium in oil prices.

Iran's Islamic Revolutionary Guard Corps said it shot down the drone after it crossed into Iranian airspace. U.S. military confirmed the drone was shot down by an Iranian surface-to-air missile, but said the surveillance drone was operating in international air space. The incident follows attacks on two international oil tankers in the Gulf of Oman last week that the United States blamed on Iran.

Experts on Iranian behavior suggest Iran will continue to act out as finances shrink amid U.S. sanctions on an array of business sectors including oil exports re-imposed on the Islamic Republic following the U.S. pullout of the Joint Comprehensive Plan of Action in May 2018. The tactic is aimed at securing concessions.

Markets now await the U.S. response, although U.S. President Donald Trump suggested the incident might have been unintentional, with the action taken by someone that was "loose and stupid." Earlier this morning, Trump tweeted, "Iran made a very big mistake!"

The White House invited Congressional leaders for a briefing Thursday afternoon on Iranian developments.

NYMEX July West Texas Intermediate futures expired at a $56.65 three-week high, up $2.89, with the August contract rallying $3.10 to a $57.07 per barrel (bbl) settlement. ICE August Brent rallied $2.63 to a $64.45 settlement, the highest on the spot continuous chart since May 31, while its premium to front month WTI futures narrowed to a more than two-month low at $7.80 bbl.

NYMEX July ULSD futures settled at a $1.8843 gallon three-week spot high, up 5.49 cents, with July RBOB futures jumping 5.08 cents to $1.7863 gallon. On Wednesday, Energy Information Administration said U.S. implied gasoline demand reached a record high during the second week of June at 9.928 million barrels per day (bpd).

Oil futures and the broader market also strengthened on expectations the Federal Reserve would cut interest rates possibly as soon as late July when the Federal Open Market Committee next meets. A FOMC statement following the conclusion of their two-day meeting Wednesday said low inflation and uncertainty over economic growth amid trade tensions could prompt the central bank to reduce the federal funds rate now at 2.5%.

The U.S. dollar continued to weaken in index trading Thursday following heavy selling following the FOMC release Wednesday afternoon, settling down 0.444 at 96.138, the lowest settlement since March 25. The dollar index settled below the 200-day moving average at 96.334.

Equities continued their rally on the increasingly dovish Fed, with the Dow Jones Industrial Average up more than 250 points in late trading, and the S&P 500 Index reached a record high, up 1% in late trading at 2,955.

Brian L. Milne can be reached at brian.milne@dtn.com

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Brian Milne