By Barani Krishnan
Investing.com – Iran’s downing of a U.S. drone has given oil prices their biggest boost for the year, and President Donald Trump’s tweet that Tehran made “a very big” but “stupid” mistake leaves crude traders unsure on how the White House will respond.
New York-traded West Texas Intermediate crude settled up $2.89, or 5.4%, at $56.65 a barrel. That was WTI’s biggest one-day gain of the year. The U.S. crude benchmark had rallied as much 6.3% earlier to a session peak of $57.37.
London-traded Brent crude, the benchmark for oil outside of the U.S., settled up up $2.63, or 4.25%, at $64.45 per barrel, The session peak was $64.80, and the percentage gain was the largest since Jan. 9.
Tehran’s Islamic Revolutionary Guard Corps said Thursday the drone was shot down near the Kouhmobarak district north of the Strait of Hormuz because it was spying on Iran. The U.S. has said the aircraft, which the Pentagon identified as a RQ-4A Global Hawk surveillance drone, was in international airspace when targeted and destroyed by a surface-to-air missile.
In a separate development, Riyadh’s Arab News service reported that Saudi air defense forces shot down a “hostile drone” launched by Yemen’s Iran-backed Houthi militia headed towards Jazan in southwest Saudi Arabia.
The shallow, narrow strait is one of the world’s most important passageways for oil shipments and Iran, facing U.S. sanctions on its oil exports, has hinted in the past that it could disrupt the channel. The strait's width ranges from 21 nautical miles to 60 nautical miles, but its two shipping lanes are far smaller, two miles wide each and separated by a two-mile-wide buffer.
Nearly a day after the shooting down of the U.S. drone, the White House had yet to say how it would respond. Trump’s initial reaction on Twitter was cryptic but ominous: “Iran made a very big mistake!” the president tweeted.
But he later seemed to backtrack from that stance, saying it was likely the action of a “stupid” individual Iranian general who made a “foolish” unintentional mistake.
“This country will not stand for it,” the president told reporters after Canadian Prime Minister Justin Trudeau at the White House, seemingly backing away from a military showdown with Tehran.
“You’ll soon find out,” Trump said, when asked if the White House would respond.
“This is a new wrinkle, a new fly in the ointment,” he added, providing a colorful quote that did not, however, give an insight into his thoughts or strategy.
While Trump has been the architect of much of the tensions with Iran, he has also been surprisingly restrained lately in his response to its taunts.
Some analysts suspect the president was doing his best not to add to the escalation of geopolitical tensions that could drive oil prices – as well as prices of gasoline at U.S. pumps – higher as he embarks on his bid for reelection in 2020. High gasoline prices have historically have a negative impact on incumbent U.S. presidents during election year.
“Trump’s measured response in recent weeks to much of the Iranian overtures is telling that he’s trying to avoid further stoking the fires of an oil rally,” said John Kilduff, partner at New York energy hedge fund Again Capital.
The drone downing comes on the heels of last week’s attacks on two tankers in the Gulf of Oman and last month’s sabotage of more vessels and oil infrastructure belonging to Saudi Arabia and the UAE. Both have blamed the attacks on Tehran. These aside, there have also been rocket attacks on U.S.-linked facilities in Iraq by suspected Iranian proxies that have stoked the fires of potential military showdown between the Islamic Republic and Washington.
U.S. officials say these incidents are evidence that Tehran is an aggressive and terrorist power that must be confronted by the international community.
Iran also pledged this week to begin enriching uranium again, raising fears that it was seeking nuclear weapons after Trump pulled the U.S. out an international nuclear accord with Tehran initiated by predecessor Barack Obama in 2015 and imposed sanctions on the Islamic Republic.
Oil prices have turned volatile since hitting 2019 highs of $66.60 for WTI and $75.60 for Brent in April. OPEC production cuts and the combination U.S. sanctions on Iranian and Venezuelan oil exports initially gave the market a gain of more than 40% on the year. But crude slipped into a bear market last month after falling as much as 20% from those April peaks on surging U.S. crude production and stockpiles and fears of a global recession from the U.S.-China trade war.
The average retail price of regular gasoline was $2.669 a gallon Thursday, down slightly from Wednesday, according to the American Automobile Association's Daily Fuel Gauge report. While up 57.4% for the year, the average has fallen for 20 straight days. The average peaked at $2.895 on May 3, up nearly 71% for 2019.