Crude Futures Up 3% on Mideast Tensions

WASHINGTON (DTN) -- Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rose to multi-month highs on Friday after a U.S. airstrike killed a high-ranking Iranian military leader. Markets are fearful of potential retaliatory attacks on Middle East oil infrastructure that could disrupt supplies from the world's largest oil producing region.

NYMEX February West Texas Intermediate surged to a $64.09 eight-month high on the spot continuous chart, settling 3% higher at $63.05 per barrel (bbl). ICE March Brent spiked $2.35 to $68.60 per bbl on the session after trading at a $69.50 -- the highest trades since the attack on Saudi Arabia oil infrastructure in mid-September. NYMEX February ULSD futures rallied 3.73 cents to $2.0614 per gallon, a seven-month spot high settlement, paring an advance to $2.1056 gallon. The February RBOB contract spiked 4.46 cents to $1.7488, edging off a $1.7824 five-month high on the spot continuous chart.

Oil futures pushed higher in afternoon trade Friday, although all contracts came off intrasession highs with the markets awaiting the response from Iran following an overnight airstrike that killed the country's top military commander. The latest reports indicate Tehran will seek legal measures at the international level against the United States for "a clear act of a terrorist attack" according to Iran's Foreign Minister Javad Zarif.

Markets, however, expect a much stronger response from the nation that has developed sophisticated capabilities in cyber and drone technology, exemplified by the September attack on Saudi oil infrastructure that knocked off 50% of the kingdom's oil output in a matter of several minutes. Furthermore, Iran's Revolutionary Guards have previously threatened security in the Strait of Hormuz -- a critical chokepoint for oil transit.

The Pentagon already announced deployment of 3,500 additional U.S. troops in the region on top of 750 troops sent earlier this week to guarantee the security of allies and American personnel in the region.

General Qasem Soleimani was a veteran commander of the Iran-Iraq War and considered the second most powerful man in Tehran behind the Supreme Leader Ayatollah Khomeini. Analysts agree that Soleimani was a unique figure in the region and likely irreplaceable for the Iranian regime. Pressure to retaliate is high.

Oil futures pared gains after Energy Information Administration released its weekly inventory report showing a big draw in commercial crude supply in the United States and large builds in products stocks amid a drop in demand.

EIA reported an 11-million-bbl combined build for products supply during the final week of December that offset an 11.5-million-bbl drop in crude stocks as refiners ramped up output. Demand for both gasoline and distillate fuels dropped, with distillate demand plunging to the second lowest weekly rate of 2019. Total U.S. crude and product exports soared however, topping 10 million barrels per day (bpd), with crude exports accounting for 4.462 million bpd of the export rate during the week reviewed -- a record high.

The decline in domestic demand did occur during a holiday week, but dovetails with concern tensions between the United States and Iran could have a deleterious effect on global trade flows that slows oil demand. The report also follows a poor reading on U.S. manufacturing released midmorning, with the Institute of Supply Management reporting its manufacturing index for the United States plunged to a 10-year low 47.2 in December, the sixth consecutive month in which manufacturing activity declined. Readings below 50 indicate contraction, with a slowdown in industrial output having an adverse impact on distillate demand.

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

(CZ)

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