The U.S. and Iran appeared to move closer to military conflict Thursday, and that’s likely to keep a floor under oil prices until the threat of supply disruptions in the Middle East passes, analysts said.
Iran’s downing of a U.S. military drone near the Strait of Hormuz hasn’t caused any losses in oil supplies, but it has ratcheted up tensions between the countries, which had already been at odds following recent attacks on two oil tankers — as well as earlier attacks on other tankers — that Washington blamed on Tehran. That’s heightening worries about potential disruptions to global oil flows.
“Wherever the red line is for the U.S. [and] Iran is, [it appears] to be edging closer,” said James Williams, energy economist at WTRG Economics. “The downing of the drone may have crossed the edge….There is a good chance we will retaliate.”
July West Texas Intermediate oil
rose $2.89, or 5.4%, to settle at $56.65 a barrel on the New York Mercantile Exchange. The front-month contract, which expired at the end of the session, saw biggest one-day dollar and percentage since late December, according to Dow Jones Market Data.
“All options [are] on the table, including military action by the U.S. and allies,” said Daniel Flynn, market analyst at Price Futures Group, and U.S. sanctions on Iran “could be in place for a long time as the world community will be angered and trade partners will not do business if the U.S. administration backs up the tough talk.”
At the same time, “Iran’s current government will succumb to the people hurting financially in their country,” said Flynn.
In a tweet Thursday, U.S. President Donald Trump said “Iran made a very big mistake!”—adding to expectations for further conflict. In subsequent remarks, however, Trump said he suspected the attack may have been an error and that someone “loose and stupid” was responsible.
The events are a reminder about what happened in the late 1980s, when then-U.S. President Ronald Reagan ordered targeted attacks on Iranian naval facilities, Marshall Steeves, energy markets analyst at Informa Economics, told MarketWatch.
The oil market saw a lot of volatility at the time, “though the world was much more dependent on the Middle East then,” he said. In that sense, it “may not be the best comparison, but it is the most suitable since it is the same situation in terms of being a U.S.-Iranian standoff.”
Still, in terms of Iranian exports, “the impact is not likely to be too large straightaway given that they are already diminished,” Steeves said. “There remains the fear that the Strait of Hormuz could be constricted or shut though for now, it’s just that—potential loss of oil transit.”
Up to a third of global seaborne oil trade passes through the strait, but the effect “would depend on whether there was a total shutdown and for how long,” he said.
So the “duration of these attacks is key to the duration of the rally [in oil]. If as last week, this is a one-off event, these gains could prove fleeting,” said Steeves.
On the other hand, a sustained period of attacks or “regular interruptions to oil exports” in the Persian Gulf could send WTI back above $60, toward its April highs, he said. Earlier this month, prices had dropped by more than 20% from those April highs to enter a bear market.
The developments come at a particularly important time for the oil markets. Seasonal demand for oil is up in the U.S. with the summer driving season and the Organization of the Petroleum Exporting Countries-led production cut deal expires at the end of this month, pointed out Scott Gecas, chief market strategist at Walsh Trading.
OPEC and its allies will meet on July 1-2 to discuss the state of the oil market and decide whether to extend the oil production cut agreement.
“With oil prices suppressed in recent weeks due to supply increases in the U.S., [they] have room to run to the upside,” said Gecas.