Oil surges after Iran downs U.S. drone and Fed signals rate cut

By Sharon Cho and Grant Smith on 6/20/2019

SINGAPORE and LONDON (Bloomberg) --Oil rose after Iran said it shot down a U.S. spy drone in its airspace, stoking Middle East tensions further after the attack on two tankers last week, while a more dovish stance from the Federal Reserve lifted financial markets.

Futures climbed as much as 3.3% in New York. The reported drone downing follows a missile strike by Yemeni rebels overnight on Saudi Arabia. The Fed’s readiness to lower interest rates for the first time since 2008 boosted stock markets and weakened the dollar, spurring demand for commodities priced in the U.S. currency. Oil also gained after U.S. government data showed inventories declined by 3.1 MM bbl last week, more than analysts had estimated.

Crude spiked as much as 4.5% a week ago after two oil tankers were attacked near the Strait of Hormuz, with the U.S. and Saudi Arabia blaming Iran for the assault. Still, swelling American inventories and a deepening U.S.-China trade war have dented the demand outlook and weighed on prices over the past two months. Washington and Beijing are set to resume talks next week at the G-20 summit in Osaka.

“Geopolitics is helping oil bulls to make a spectacular come-back after a few days’ of directionless trading,” said Tamas Varga, an analyst at PVM Oil Associates in London.

West Texas Intermediate for July delivery, which expires Thursday, surged as much as $1.77 to $55.53/bbl on the New York Mercantile Exchange and traded at $55.28/bbl. The more-active August contract traded 3.2% higher at $55.68/bbl.

Brent for August settlement rose $1.63 to $63.45/bbl on London’s ICE Futures Europe Exchange. Prices closed 0.5% lower at $61.82 on Tuesday. The global benchmark crude traded at a $7.73 premium to WTI for the same month.

Iran said it shot down an American drone that was spying and stated it would “defend Iran’s airspace and maritime boundaries with all our might.”

U.S. crude inventories fell for the first time in three weeks through June 14, according to the Energy Information Administration. Stockpiles slid more than double the median analyst estimate for a 1.25-MM bbl decline. American oil production dropped for a second week to 12.2 MMbpd.

Oil Market News

OPEC is poised to extend oil-output cuts for the rest of the year when its members meet next month to assess global supply and demand. Saudi Arabia, Iraq and the United Arab Emirates all want to keep restraining production in a bid to buttress crude amid signs of faltering demand.

Iraq’s oil ministry said it boosted security around oil facilities after a rocket exploded near an Exxon Mobil Corp. workers’ camp in the southern part of the country.

Brent is a “coiled spring” and may surge to $75/bbl over summer on improving fundamentals, rising geopolitical tensions in the Middle East and financial positioning, according to Citigroup.

Nigerian President Muhammadu Buhari has appointed Mele Kyari as group managing director of NNPC, according to a tweet from the state oil company. 

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