Oil Prices Up After US Drone Strike

West Texas Intermediate (WTI) and Brent crude oil futures posted strong gains on the 3^rd January as the oil market digested news about heightened tensions between the United States and Iran.

The February WTI contract gained US$1.87 on the 3^rd, settling at US$63.05 per barrel. The benchmark peaked at US$64.09 and bottomed out at US$61.13. Compared with the settlement on the 27^th December, WTI is up nearly 2.2 percent.

Brent crude for March delivery ended the day at US$68.60 per barrel, reflecting a US$2.35 increase for the day and a 2.6-percent increase week-on-week.

Crude oil received a boost from the latest geopolitical development in the Middle East, specifically a US drone airstrike in Iraq which killed a top Iranian general. Iran’s president has pledged to avenge the US military action the caused the death of General Qassem Soleimani.

Citing Iranian-backed militia attacks earlier this week at the US Embassy compound in Baghdad and increasing unrest in Iraq and the region, on the 3^rd January the US State Department urged all American citizens in Iraq to leave the country immediately.

The department also reported that all public consular operations at the facility are suspended until further notice.

Tom McNulty, Houston-based managing director with Great American Group, told Rigzone that North American oil output is helping the market to absorb the shock of the incident and potential repercussions.

“There is an important reason why Brent and WTI are not rising more rapidly today, and that is the capability and potential for the North American oil complex to bring crude barrels to market far more rapidly than was possible just a few short years ago,” he explained.

Mr McNulty also pointed out that oil traded up on the 3^rd January when the US Energy Information Administration reported a “huge” drop in domestic commercial crude inventories exceeding 11 million barrels.

“The forecast was not even close to that,” Mr McNulty said of the major drawdown in oil stocks. “So this two-percent to three-percent rise today is measured and reasonable for now, and some of it is not even related to the geopolitical stressors.”

Jay Hatfield, portfolio manager for the oil and infrastructure exchange traded fund AMZA, told Rigzone that oil prices likely had already included a political risk premium ranging from US$2 to US$3 per barrel after the Sept. 2019 attack on a key Saudi oil processing facility.

“Prices are up another US$2 after the attack on General Soleimani,” Mr Hatfield said. “We believe that oil prices will remain elevated in the current range with Brent in the US$70 area until we see how Iran will retaliate against the U.S. Another attack on Saudi oil production would be the worst-case scenario, with another scenario being an attack on oil tankers.”

To be sure, Mr Hatfield predicted that an attack on non-oil-related facilities likely would cause the Brent price to fall back to the middle of the US$60 to US$70 range.

Reformulated gasoline (RBOB) also finished higher on the 3^rd January. February RBOB added four cents to settle at US$1.75 per gallon. RBOB is essentially flat for the week.

Henry Hub natural gas also posted a gain on the final trading day of the first week of 2020. February gas futures added nearly one cent to close at US$2.13 – a 4.5-percent decline from last Friday, the 3rd January.

Source: Rigzone