Oil rig
Image Credit: Pixabay

Abu Dhabi: Oil is expected to trade higher due to current tensions between the US and Iran, according to analysts.

Tensions between the US and Iran rose after a US drone was shot down by the Iranian security forces on Thursday stoking fears of a war between the two countries and interruption to oil supplies from the Strait of Hormuz, one of the busiest shipping routes in the world. US president Donald Trump said that he called off an imminent retaliatory strike against Iran because it would kill 150 people which was not proportionate to shooting down an unmanned drone.

Global benchmark Brent was up by up by 1.16 per at $65.20 per barrel when markets closed on Friday with the US crude West Texas Intermediate was at $57.43 per barrel.

“The tension impacts logistics of trade and could be an indicator of supply interruption,” said Issam Kassabieh, senior financial analyst, research department at Menacorp in Dubai.

He also said the current trade tensions between the US and China will weigh on economies slowing down demand for oil but a potential war between the US and Iran could be a factor in pushing prices higher.

The comments come as tensions between the USA and Iran rise following attacks on oil tankers as well as on Saudi Arabia’s oil installations in the last one month in the Arabian Gulf.

In the latest escalation, a US drone was downed by the Iranian forces near the Strait of Hormuz that led to fears of a war between the two countries and a large scape disruption to oil supplies from the region to the rest of the world.

“We expect these latest developments have at least for now created a floor under oil,” Ole Hansen, head of commodity strategy at Saxo Bank said in a note.

“Not least considering our belief that the Opec+ group nations at their meeting on July 2 will reaffirm their commitments to keeping oil production capped for the remainder of the year. Adding to this is the improved risk appetite from the expected cut in US interest rates and a weaker dollar.”

UAE energy minister Suhail Al Mazroui also said last week Opec (Organisation of the Petroleum Countries) and its allies are considering extending the production cut agreement due to build up in oil inventories especially in the United States.

Oil producing countries including Russia are cutting output by 1.2 million barrels per day since the start of 2019. The six month deal will end at the end of June.