Oil prices jumped in early Asian trading on Wednesday after the United States launched what it described as self-defense strikes against Iranian military targets near the Strait of Hormuz.
At the time of writing, Brent crude was up 1.03% at $92.39 per barrel, while West Texas Intermediate had gained 0.91% to trade at $89.00 per barrel.
U.S. Central Command said the strikes were in response to Iran’s downing of a U.S. Army Apache helicopter in the region. U.S. forces then “struck Iranian air defense, ground control stations, and surveillance radar sites” near the Strait. Iran denied having shot down the helicopter, claiming it was an accident that the U.S. was using as a pretense for attacking.
President Trump had vowed to respond to the downing of a U.S. helicopter overnight, but later said in an interview with the Wall Street Journal that it “wasn’t a big deal” because the pilots survived.
Oil prices spiked at the start of the week when Iran and Israel exchanged missile attacks after Israel had targeted southern Beirut – something that Tehran had set as a red line. Tensions appeared to cool on Tuesday, with both countries finding an off-ramp under significant pressure from the U.S. and regional allies.
The latest flare-up between the U.S. and Iran has spooked markets once again, and traders will be looking for signs that it remains a tit-for-tat exchange rather than the start of a new round of escalation.
Beyond geopolitical catalysts, oil prices have been supported by substantial drawdowns in U.S. crude inventories, with the latest report from the API on Tuesday afternoon showing crude stocks falling by another 9.12 million barrels last week. That marks the eighth consecutive weekly decline and highlights the tightness of physical markets even as traders continue to focus on potential peace talks.
There is plenty of debate within the industry over exactly how much demand destruction is taking place, how much oil is currently getting through the Strait, and how quickly flows might return if a peace deal is agreed upon. But global inventory numbers are becoming increasingly difficult to ignore, and time is ticking for oil markets as analysts debate if we are nearing the “operational minimum”.
Over the last month, markets appear to have priced in a gradual de-escalation due to efforts by the White House to broker a broader settlement with Tehran. Those expectations, alongside ever-dwindling reserves, are leading to increasingly volatile oil markets when attacks take place.
Iran’s Foreign Minister Abbas Araghchi has warned that Tehran will not leave attacks unanswered, with Iranian state media reporting explosions in Bahrain and Kuwait. Iranian Press TV claimed the U.S. Navy’s Fifth Fleet base in Bahrain was targeted.
It’s an all too familiar feeling for oil markets, with traders balancing the risk of escalation against hopes of a peace deal, and all the while, the amount of oil in storage is dwindling away.
By Josh Owens for Oilprice.com
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