An unarmed, unmanned U.S. drone flying in international airspace was fired on by Iran last week, Pentagon officials confirmed on Thursday, highlighting mounting tensions between the two countries. The move's ultimate impact on oil prices will depend on several factors, analysts said. “When geopolitical tensions increase, prices tend to rebound due to the simple fact that there is close to no spare capacity,” said Olivier Jakob, founder and managing director of Swiss-based Petromatrix.
Oil traders aren’t forecasting much of a bullish rally from the attack, though, saying tightening sanctions on the oil producer that halved the country’s oil exports this year have already been priced into the market, easing supply-side pressures on the West. Oil traded slightly higher on Thursday, settling up 0.77% to $85.09 a barrel. Crude is still off about 22.48% from its 52-week high of $106.77 from February and is down 13.90% year-to-date. While oil prices ticked up about 35 cents following initial headlines of the attack on the drone, the modest buying slowed once the Pentagon confirmed the attack occurred late last week.
Of Thursday’s reaction in the oil markets, Jeff Mower, editor in chief of Platts’ Oilgram price report, said the market “may have just shrugged it off.”
“The truth of the matter is from an oil standpoint, if indeed this were a live story, we might have seen a bigger reaction, but given it happened a few days ago, it’s not a big deal,” said Phil Flynn, a futures account executive for the Price Futures Group and author of The Energy Report.
U.S. and European sanctions on Iran have choked the country’s oil revenue, an effort by the Western nations to pressure the Middle Eastern country to stall uranium enrichment, a key component in building nuclear weapons. Geopolitical tensions, particularly in the Middle East, tend to cause dramatic moves in oil prices amid supply fears.
In 2007, for example, when Iran seized members of Britain’s Royal Navy after claiming they had been in Iran’s territorial waters, oil spiked to a three-month high. However, Flynn said the market is “better supplied than it was back then,” which provides the oil market the flexibility to bounce back or ignore potential supply disruptions. And with oil sanctions on Iran this year already crippling the nation’s exports, western oil consumers have largely replaced Iranian oil, meaning the drone attack may not have as critical impact on the market as it might have a few years ago, Flynn said.
Any direction prices take in reaction to last week’s drone strike will depend on a number of factors, including whether further oil sanctions against Iran are enacted or whether the U.S. responds to the attack militarily or otherwise. “I think [the market] has priced in the loss of Iranian exports to a large degree,” Mower said. “But that’s not to say it can’t have an impact down the road.”
In its announcement Thursday, the Pentagon said Iran fired on an unarmed U.S. drone last week that had been flying over the Arabian Sea in international airspace about 16 nautical miles off the coast of Kuwait. The U.S. said it was never in Iranian airspace and that the drone was conducting “routine surveillance.”
Despite being fired at twice and pursued by two Iranian jets for a short time, the drone was never hit. Pentagon spokesman George Little said the U.S. has protested to the Iranians and when asked how the U.S. could respond, he said there are a wide range of options. When asked whether it should be considered an act of war, though, Little said he didn’t want to get into “legal characterizations.”
The U.S. also unleashed a new round of financial sanctions against Iran on Thursday, the first since President Barack Obama won reelection earlier this week. The AP is reporting that “A prominent Iranian parliament member said Friday that a U.S. drone violated Iran's airspace a week ago, when the Pentagon says it was fired on. The U.S. maintains the pilotless craft was over international waters. The AP is also reporting that a senior Israeli official says Iran has diverted some of its enriched uranium from military to civilian use, thereby slowing down a push for nuclear arms by some eight months. Defense Minister Ehud Barak says this has extended what Israel considers to be a timeframe for Iran to attain an atomic bomb "until the spring or summer."
Gas rationing in New York as the nor’easters mercifully passes. Oil still worried about demand destruction. Worries over Europe and worries about a US recession is weighing on prices. We may see some Friday short covering but the market is still looking very weak. Nat Gas could not sustain a rally after a supportive report. Warm weather and demand destruction could be setting us up for the next leg down.