By Jessica Resnick-Ault
NEW YORK (Reuters) - Oil soared more than 5% higher on Thursday after Iran shot down a U.S. military drone, raising fears of a military confrontation between Tehran and Washington.
Expectations that the U.S. Federal Reserve could cut interest rates at its next meeting, stimulating growth in the world's largest oil-consuming country, and a drop in U.S. 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 U.S. 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 a.m. EDT (1533 GMT). U.S. 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 U.S. 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.
U.S. President Donald Trump said Iran made "a very big mistake" by shooting down the U.S. 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 U.S. 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 U.S.-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-U.S. 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.