Drone Shooting Boosts Oil Prices as Analysts Ponder Desperate Iran's Next Move

One expert says Iran is trying to jack up shipping insurance premiums: File Image/Pixabay

Escalating conflict between the U.S. and Iran after the Islamic republic shot down a U.S. military drone produced an unsurprising response from crude traders on Thursday: West Texas Intermediate crude settled up $2.89, or a massive 5.4 percent, while Brent shot up $2.79 -  a 4.5 percent increase - to $64.61 per barrel.

Crude on Thursday was also supported by 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.

Kent Moors, executive chair of Energy Capital Research Group, said of the Iran situation, "We had a market that was trading on the assumption that these events had no great impact on the overall price; that changed as of overnight, now we have a situation in which the ability to move vessels through the Strait of Hormuz for the first time is genuinely at issue, and this is what has caused prices to spike."

As for Iran's motivation for the tanker attacks, Eurasia Group noted that Iranian leaders have often threatened that if they can't export their oil, neither will anyone else, and last week's attacks "appear to be part of a systematic Iranian effort to demonstrate that peace and security in the Gulf is contingent on its own economic stability."

Andreas Krieg, a lecturer at the School of Security Studies at King's College London, added, "the Iranians have their backs against the wall, and there's very little they can lose because they're already in a state of absolute loss after the imposition of the maximum pressure [U.S.] sanctions regime."

While this may seem like reckless behaviour, Ali Vaez, Iran project director at Crisis Group, pointed out that "If the Iranians were indeed behind this, then I think the main motive is to deter the U.S. from further ratcheting up pressure on Iranian oil exports.

"But this also has the added benefit of ransoming the oil market, which will jack up the price on shipping insurance premiums, and this will allow the Iranians to compensate to a certain extent for the loss of their oil exports as a result of U.S. sanctions."

Despite widespread fear and loathing over U.S. president Donald Trump's sabre rattling at Iran (said to be designed to persuade that country to stop menacing its neighbourhood and the wider world with conventional and unconventional weapons), the sanctions have had their intended effect of gutting its economy; plus, Bijan Zanganeh, oil minister for the Iranians, admitted this week that Europe was not cooperating with Tehran to buy its oil in the face of the sanctions.