Oil prices spiked almost two per cent today as Middle East tensions ratcheted up after the US Navy struck an Iranian drone with a missile in the Strait of Hormuz.
Brent crude oil rose 1.5 per cent to $62.88 while West Texas Intermediate (WTI) crude climbed one per cent to $56 after the attack.
Read more: Iran urges UK to release seized oil tanker
President Donald Trump said the US “destroyed” the drone after it closed within 1,000 yards of a US Navy ship.
The drone ignored “multiple” calls to back down, the US said. Meanwhile Iran said it had no information about a missing drone.
The Strait of Hormuz is a bottleneck for global trade flows of crude oil, and is at the centre of boiling tensions in the Gulf.
Iran’s Revolutionary Guards yesterday said they had seized a foreign vessel. Earlier incidents have seen a British Navy warship ward off three Iranian ships attempting to seize a British oil tanker.
The UK has also captured an Iranian oil tanker the government said was on its way to deliver oil to Syria.
The latest standoff cushioned falling oil prices over supply fears, though benchmark prices remained on schedule for their biggest weekly drop in seven weeks.
WTI was on course for a weekly fall of six per cent and Brent could record a drop of over five per cent.
The INternational Energy Agency slashed its full-year oil demand forecast from 1.2m barrels per day to 1.1. Barrels per day yesterday.
Meanwhile Opec has decided to extend production cuts to combat falling prices.
Stephen Innes, of Vanguard Markets, said the incident offers “a modicum of support for oil markets amidst a very bearish global growth landscape”.
“Few are willing to chase this sell-off lower in Asia,” he added. “The dovish central bank’s pivots do lend support to the medium-term trajectory for oil while provided Opec remains committed to maintaining the floor, and as supply risk stays in the picture, it is challenging to envision [the] oil market falling off a cliff at this stage.”
Stocks in Asia rose overnight after US Federal Reserve preisdent John Williams hinting at “preventative measures” to avert a “disaster”.
Markets interpreted that as a nod towards deeper cuts to interest rates, with Bloomberg reporting that markets have priced in a 40 per cent chance of a 50 basis point cut this month.