Global oil prices surged Thursday after a U.S. military drone was shot down near the Strait of Hormuz, the busy shipping lane that separates Iran from the Gulf states, as military tensions between Washington and Tehran continue to escalate.
U.S. military officials said an Iranian surface-to-air missile was to blame for the drone shooting, which was in international airspace patrolling the region as part of an effort to ensure the safety of tankers passing through the Strait and the Gulf of Oman following a series of attacks last week. Iran's Revolutionary Guard said the Northrop Grumman (NOC) made drone was a spying device and was flying over Iranian airspace.
Iran made a very big mistake!— Donald J. Trump (@realDonaldTrump) June 20, 2019
When asked later Thursday at a news conference with Canadian President Justin Trudeau about whether the U.S. would strike back at Iran, Trump said, "You'll soon find out."
Oil prices were also supported by a slump in the U.S. dollar, which was marked nearly 0.9% lower from Wednesday's levels against a basket of six global currencies following last night's Federal Reserve policy meeting, which signaled multiple-rate cuts before the end of the year.
Brent crude contracts for August delivery, the global benchmark, were up 3.75% and changing hands at $64.14 a barrel, while West Texas Intermediate contracts for July, which are more tightly linked to U.S. gas prices, were rising 5.24% to $56.80 a barrel.
Investors are still likely to focus on supply developments over the coming weeks, however, with the annual meeting of OPEC members now scheduled for July 1 and 2 in the Austrian capital of Vienna. The cartel, alongside non-member allies such as Russia, are expected to extend their agreement on production cuts, which are taking 1.2 million barrels from the market each day, well into the second half of the year.
"There is growing consensus that an extension to the current deal will be agreed, with the UAE oil minister the latest to express his confidence that OPEC+ will continue with the deal for the remainder of the year," said ING's head of commodity strategy Warren Patterson. "Given growing concerns over demand growth, which have been highlighted by a number of agencies revising lower their demand growth estimates for the year, we believe an extension is inevitable."
That said, global demand has been waning for the past few months, as the ongoing trade war between Washington and Beijing saps global economic growth prospects and tames imports from some of the world's biggest energy users.
The International Energy Agency cut its 2019 demand growth forecast Friday to 1.2 million barrels per day, noting that "the main focus is on oil demand as economic sentiment weakens", and adding that a "worsening trade outlook" was a common theme around the regions it covered in its monthly outlook report.
Those views were echoed by the U.S. Energy Information Administration, which said last week that domestic supplies rose by 2.21 million barrels in the week ending June 7 to take the overall supply tally to 485.47 million barrels, the highest in nearly two years.
The EIA also trimmed its forecast for world demand yesterday to around 1.22 million barrels per day in its regular Short-Term Energy Outlook report, a 160,000 reduction from its prior forecast. It also lowered its growth estimate for 2020 by 110,000 to 1.42 million barrels per day.
OPEC's monthly report, which was published last week, also noted "significant downside risks from escalating trade disputes spilling over to global demand growth remain."