Crude edges higher amid plane crash controversy

London — Crude oil futures were slightly higher in late European morning trading Friday, with questions over the cause of a plane crash in Iran this week and risk premium associated with Middle East tensions overshadowing bearish supply fundamentals.

At 1130 GMT, front-month ICE Brent March crude futures were up 15 cents from Thursday's settle at $65.52/b, while the front-month NYMEX February light sweet crude futures contract was trading 9 cents higher at $59.65/b.

Focus was turned Friday to the latest news regarding the Ukrainian plane that crashed near Tehran on Tuesday, shortly after Iran's retaliatory strikes on two US military bases in Iraq. Amid claims that the passenger jet might have been mistakenly shot down by an Iranian missile, Iran said Friday that it would allow Boeing representatives to inspect the flight recorders from the Ukraine International Airlines Boeing 737-800.

According to Commerzbank commodities analyst Carsten Fritsch, considering the topic of US-Iran tensions as closed "may prove somewhat premature if reports are confirmed that the Ukrainian passenger plane was (accidentally) shot down."

"Transport costs could rise sharply... because insurance companies are likely to demand higher premiums for oil tankers passing through the Strait of Hormuz. What is more, tanker rates are rising due to the increased demand for oil from outside the crisis region," Fritsch said.

Nevertheless mixed global oil market fundamentals remain at the forefront.

"Weakening fundamentals for the first quarter and an underlying a version by the Iranians of getting involved in a direct conflict with the US will continue to limit upside to Brent prices -- not to mention oil market confidence in stocks, spare capacity, and global strategic reserves," Platts Analytics said in its January Commodities Brief.

"Much higher geopolitical risk means prices may stay in the $65-70/b range for the first quarter although right now there seems to be a rapid de-escalation of the tensions between Iran and US," it added.

According to Mayank Joshi at Chatham Financial, the crude futures price reaction in the past few days was similar in nature to the spike in oil markets in September when the Saudi oil facilities were attacked, except there was no physical disruption to oil flows this time around.

"Given the recent incidents, it is fair to expect some geopolitical risk premium priced into the market in the short to medium term but as the rhetoric from both sides fades away, the market will look to turn back the focus to demand/supply fundamentals and OPEC+ compliance to cuts in the coming weeks," Joshi said.

--Virginie Malicier, virginie.malicier@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com