Oil Higher After Hefty Gains Last Week

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange extended higher in early trade Monday following hefty gains last week, as the United States prepares major new sanctions against Iran while financial markets offer additional support ahead of U.S.-China trade talks.

At 9 a.m. ET, NYMEX August West Texas Intermediate futures were up $0.52 near $57.95 per barrel (bbl), with the ICE August Brent contract $0.25 higher at $65.45 bbl. NYMEX July ULSD futures gained 0.6 cents to near $1.9220 gallon, with the July RBOB contract up 2.9 cents near $1.8850 gallon.

Oil futures continue to build on last week's rally after early-morning reports indicate another attack against a Saudi airport on Monday, while the United States is set to increase the scale of economic sanctions against Iran.

U.S. Secretary of State Mike Pompeo said "significant" new sanctions would be announced later today aimed at further choking off resources that Tehran uses to fund its activities in the region. The new round of sanctions follows attacks on six international oil tankers and a U.S. military drone in and near the Strait of Hormuz -- the world's largest transit lane for seaborne oil shipments. Iranian military officials said on Monday that Tehran is capable of shooting down more U.S. drones, while calling a new round of sanctions unacceptable.

U.S. President Donald J. Trump said on Sunday he would not rule out military action against Iran, while tweeting "I never called the strike against Iran BACK, I just stopped it from going forward at this time."

Trump aborted retaliatory air attacks last week on three different sites after Iran shot down an unmanned U.S. drone in international waters. The news that Trump considered military action against Iran raised concerns that hostilities are escalating quickly and could develop into large-scale military confrontation in the short term.

Reuters reported that Asian refiners have started to look for alternative crude sources that could avoid shipping through the Strait of Hormuz, which include West African and U.S. suppliers. Some analysts believe the latest escalation in geopolitical tensions could result in a meaningful pickup in demand for non-Strait of Hormuz-linked barrels.

Separately, China confirmed on Sunday that President Xi Jinping will attend the Group of 20 summit in Osaka, Japan, scheduled for Friday and Saturday (6/28-29), where he is scheduled to meet with Trump. The highly anticipated meeting between the two leaders could be pivotal in getting U.S.-China trade talks back on track and in deescalating tensions between the world's two largest economies. Global financial markets rallied last week, as broader trade optimism spurred investors' appetite for riskier assets, including oil futures.

U.S. indexes are up slightly Monday morning, with the DJIA again inching toward an all-time high, while S&P 500 Index is poised to open a new trading week up 0.2% after ending at a record high last week. Stocks in Asia mostly increased, with Shanghai Composite up 0.2% and Nikkei gained 0.1%. Besides the meeting, market participants are also focused on the direction of monetary policy in the United States and the European Union. The Federal Reserve strongly indicated two rate cuts in the coming months, while European Central Bank President Mario Draghi hinted last week at a new era of monetary easing.

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

(CZ)