Oil pares morning gains; supported on US-Iran tensions

Singapore — Crude oil futures retreated from early morning highs in the mid-afternoon trade in Asia Wednesday but remained supported after Iran launched missiles on two US military bases in Iraq in retaliation to the US drone strikes last week.

At 2:20 pm Singapore time (0620 GMT), the front month March ICE Brent crude futures was up 66 cents/b (0.97%) from Tuesday's settle at $68.93/b, while the NYMEX February light sweet crude contract was 46 cents/b (0.73%) higher at $63.16/b.

ICE Brent crude futures pared some gains from the morning highs, which touched as high as $71.75/b but fell to high $68/b on limited impact from Iran's missile retaliation on US bases in Iraq.

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Additional coverage: US-Iran tensions

Iranian state TV said Tehran started an attack on US facilities in Iraq in retaliation for last week's US drone strike in Baghdad that killed General Qassem Soleimani.

Iranian foreign minister Javad Zarif said Wednesday that Tehran has taken "proportionate measures in self-defense" after having launched missiles striking two US military bases in Iraq.

"Iran took & concluded proportionate measures in self-defense under Article 51 of UN Charter targeting base from which cowardly armed attack against our citizens & senior officials were launched," Zarif said in a tweet.

"We do not seek escalation or war, but will defend ourselves against any aggression," he said.

"Tensions remain high in the Middle East as Iran retaliates over the US precision strike that killed Tehran's top general. Intense market fears over supply-side disruptions and potential military conflict between both parties have imposed a risk premium for oil prices in the current term," said Benjamin Lu, investment analyst at Phillip Futures.

Lu added that the geopolitical risk between US and Iran added an immediate premium for oil prices, which looked poised to trend higher on jittery market sentiment over political developments and militaristic concerns for the immediate term.

US President Donald Trump tweeted in response to the missile strikes on Wednesday saying, "All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning."

The tweet by President Trump provided a floor for prices, analysts pointed out.

"When news hit that the White House would make no immediate comment, that actually worried me to no ends ... But with Trump following that up suggesting he will make a statement on Wednesday ... its calming nerves and risk assets are making a comeback as the market is taking some comfort in the lack of immediate US military follow-through," said Stephen Innes chief Asia market strategist at AxiTrader in a note Monday.

Traders were quick to make profits after the Wednesday morning spike. This was expected as there remained ample spare capacity in the market with no physical supply disruption so far, Innes said.

"But I wouldn't expect prices to drift too far south as it's unlikely we've seen the end of the matter," Innes added.

As of 0620 GMT, the US Dollar Index was up 0.03% at 96.625.

--Ng Jing Zhi, jz.ng@spglobal.com

--Edited by Kshitiz Goliya, kshitizgoliya@spglobal.com