U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher shortly before the regular session opening amid renewed tensions between the United States and Iran.
The United States said on Thursday that a U.S. Navy ship had “destroyed” an Iranian drone in the Strait of Hormuz after the aircraft threatened the vessel, but Iran said it had no information about losing a drone. Earlier in the week, crude oil prices fell sharply after the U.S. said it would begin talks with Iran about its nuclear missile program.
Today’s rally means the market is taking back some of those earlier losses. It also indicates that we’re not likely to see a prolonged rally unless military action stops the flow of oil from the region.
Britain pledged to defend its shipping interests in the Middle East, while U.S. Central Command chief General Kenneth McKenzie said the United States would work “aggressively” to enable free passage after recent attacks on oil tankers in the Gulf.
Gains are also being supported by indications that the U.S. Federal Reserve will cut rates aggressively to support the economy. Late Thursday, FOMC Member John Williams implied the Fed “should act quickly” in raising interest rates. Traders read this to mean the central bank may make an aggressive 50-basis point rate cut when it meets on July 30 -31.
On the demand side of the equation, the International Energy Administration (IEA) is revising its 2019 oil demand growth forecast to 1.1 million barrels per day (bpd) and may cut it again if the global economy and especially China shows further weakness, EIA Executive Director Fatih Birol said.
“China is experiencing its slowest economic growth in the last three decades, so are some of the advanced economies … if the global economy performs even poorer than we assume, then we may even look at our numbers once again in the next months to come,” Birol told Reuters in an interview.
Last year, the IEA predicted that 2019 oil demand would grow by 1.5 million bpd but had already cut the growth forecast to 1.2 million bpd in June this year.
Escalating tensions between the U.S. and Iran could underpin prices today, but gains are likely to be limited by concerns over demand. Furthermore, don’t expected a prolonged rally unless there is an actual supply disruption in the region, especially after bullish speculators were blown out of the market earlier in the week.
This article was originally posted on FX Empire
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