Oil soared more than 5 percent higher on Thursday after Iran shot down a US military drone, raising fears of a military confrontation between Tehran and Washington. Expectations that the US Federal Reserve could cut interest rates at its next meeting, stimulating growth in the world's largest oil-consuming country, and a drop in US crude inventories also supported prices. "It's a confluence of events: there's a looming easing cycle which is going to hit the dollar and prop up commodity prices and there are also the tensions with Iran," said John Kilduff, a partner at Again Capital Management in New York.
The security premium built into oil prices could rise further as tensions between the US and Iran heat up, he said. Brent crude, the global benchmark, was up $2.40, or 3.9%, at $64.22 a barrel by 11:33 am. EDT (1533 GMT). US West Texas Intermediate crude rose $2.92, or 5.4%, to $56.68 a barrel. The contract was up more than $3 a barrel earlier in the session.
Brent's premium over WTI narrowed to its lowest since April. The move came as US crude rose more quickly than Brent due to the tailwind provided by potential Federal Reserve policy, said Bob Yawger, director of futures at Mizuho in New York. US President Donald Trump said Iran made "a very big mistake" by shooting down the US military drone that Tehran said was on a spy mission over its territory.
The drone was downed in international airspace over the Strait of Hormuz by an Iranian surface-to-air missile, a US official said. Iran's Revolutionary Guards said the drone was flying over southern Iran.
Tension has been rising in the Middle East, home to over 20% of the world's oil output, after attacks on two tankers near the Strait of Hormuz, a chokepoint for oil supplies. Washington blamed Tehran for the tanker attacks. Iran denied any role.
Concern about slowing economic growth and a US-China trade dispute has pulled oil lower in recent weeks. Brent reached a 2019 high of $75 in April. The prospect of further rate cuts could prove the more significant factor for oil, said Petromatrix analyst Olivier Jakob, should Iran-US tension not escalate. "The Fed and the cutting of rates is something that will provide more substantial support," he said.
The Organization of the Petroleum Exporting Countries and allies including Russia agreed this week to meet on July 1-2, ending a month of wrangling about the timing.
The coalition known as Opec+ looks set to extend a deal on cutting 1.2 million barrels per day of production. The deal expires at the end of June.
US President Donald Trump played down Iran's downing of a US military drone on Thursday, saying he suspected it was shot by mistake and that "it would have made a big difference" to him if the remotely-controlled aircraft had been piloted. While the comments appeared to suggest Trump was not eager to escalate the latest in a series of incidents with Iran, he also warned that: "This country will not stand for it."
Tehran said the unarmed Global Hawk surveillance drone was on a spy mission over its territory but Washington said it was shot down over international airspace. "I think probably Iran made a mistake - I would imagine it was a general or somebody that made a mistake in shooting that drone down," Trump told reporters at the White House. "We had nobody in the drone. It would have made a big difference, let me tell you, it would have made a big, big difference" if the aircraft had been piloted, Trump said as he met Canadian Prime Minister Justin Trudeau in the Oval Office.
The United States, which called the event an "unprovoked attack" in international air space, is pursuing a campaign to isolate Iran to contain its nuclear and ballistic missile programmes and limit its role in regional wars. The incident was the latest in an escalating series of incidents in the Gulf region, a critical artery for global oil supplies, since mid-May including explosive strikes on six oil tankers as Tehran and Washington have edged towards confrontation.
It was unclear how the United States might respond and US House of Representatives Speaker Nancy Pelosi, the top Democrat in Congress, said Washington had no appetite for war with Iran. "It's hard to believe it was intentional, if you want to know the truth. I think that it could have been somebody who was loose and stupid that day," Trump said, referring to the drone shooting.
The Trump administration called top congressional leaders to the White House for a briefing later on Thursday on Iran, a source with knowledge of the meeting said. Iran has denied involvement in the tanker attacks, but global jitters about a new Middle East conflagration disrupting oil exports have triggered a jump in crude prices. Saudi Arabia, Washington's main gulf ally, said Iran had created a grave situation with its "aggressive behaviour" and the kingdom was consulting other Gulf Arab states on next steps.
Tensions with Iran flared with Trump's withdrawal last year from a 2015 nuclear accord with Iran and have worsened as Washington imposed fresh sanctions to throttle Tehran's vital oil trade. Iran retaliated earlier this week with a threat to breach limits on its nuclear activities imposed by the deal.
Iranian state media said the "spy" drone was brought down over the southern Iranian province of Hormozgan, which is on the Gulf, with a locally made "3 Khordad" missile. A US official said the drone had been downed in international air space over the Strait of Hormuz, through which about a third of the world's seaborne oil exits the Gulf. . Earlier, a US official had described the drone as an MQ-4C Triton, a similar aircraft.
A US official said the drone, an RQ-4A Global Hawk, had been downed in international air space over the Strait of Hormuz, through which about a third of the world's seaborne oil exits the Gulf.. Earlier, a US official had described the drone as a Triton, a similar aircraft.
Navy Captain Bill Urban, a spokesman for the US military's Central Command, said Iran's account that the drone had been flying over Iranian territory was false. "This was an unprovoked attack on a US surveillance asset in international air space," Urban said. The drone, he added, was downed over the Strait of Hormuz at approximately 2335 GMT - in the early morning hours of local time in the Gulf.
Separately, a US official told Reuters on condition of anonymity the debris field from the drone was in international waters in the Strait and US naval assets have been dispatched to the area. Iran's foreign ministry said the drone had violated Iranian air space and warned of the consequences of such "illegal and provocative" measures.
Independent confirmation of the drone's location when it was brought down was not immediately available. A Iranian Revolutionary Guards statement said the drone's identification transponder had been switched off "in violation of aviation rules and was moving in full secrecy" when it was downed, Iranian state broadcaster IRIB reported.
"Our air space is our red line and Iran has always responded and will continue to respond strongly to any country that violates our air space," Ali Shamkhani, secretary of the Supreme National Security Council, told Iran's Tasnim news agency. The Global Hawk's manufacturer, Northrop Grumman, says on its website that it can fly for over 24 hours at a time at altitudes higher than 10 miles (16 km). Upping the ante in its dealings with Iran, Washington said on Monday it would deploy about 1,000 more troops, along with Patriot missiles and manned and unmanned surveillance aircraft, to the Middle East on top of a 1,500-troop increase announced after the May tanker attacks.