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Crude tests three-week highs as market eyes US-Iran tensions

New York — Crude futures settled at three-week highs Thursday as the market eyed rising tensions between Tehran and Washington following the downing of a US surveillance drone over the Strait of Hormuz.

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NYMEX July WTI settled $2.89 higher at $56.65/b and ICE August Brent was up $2.63 at $64.45/b.

Crude prices moved higher overnight after an Iranian surface-to-air missile brought down a US drone flying above the Strait of Hormuz. But oil futures stabilized at higher levels Thursday afternoon following a steep run up during morning trading as US President Donald Trump equivocated on a potential US response to the incident.

"Iran made a very big mistake," Trump said after a meeting with his top national security advisers. "We didn't have a man or woman in the drone. It would have made a big, big difference."

When asked by reporters on a US response, Trump said: "Let's see what happens," cautioning that he was not being pushed to war by advisers.

"But this is a new wrinkle, a new fly in the ointment what happened, shooting down a drone," Trump said. "And this country will not stand for it, that I can tell you."

Iranian officials said the drone had crossed into its airspace, while the US maintains it was in international airspace.

NYMEX July ULSD settled up 5.49 cents at $1.8843/gal and July RBOB climbed 5.08 cents to $1.7863/gal.

"The balance of posturing in the US and Iran is becoming more delicate by the day," S&P Global Platts Analytics analysts said. "We still believe a dramatic US military response is unlikely, as the US suffered no human casualties and the US Administration has so far preferred economic pressure. But risks can't be denied."

Crude futures stepped higher in midmorning trading Thursday after Trump's initial response to the drone attack.

"Iran made a very big mistake!" Trump said Thursday morning on Twitter.

WTI jumped more than $1 to an intraday high of $57.02/b immediately following Trump's comment, while August Brent peaked at $64.82/b. Later, both contracts pulled back from these highs.

The fresh Middle East crisis added fuel to an already bullish oil market, analysts said.

"The fear factor is back in the market," Price Futures Group analyst Daniel Flynn said, "Looks like Trump is talking tough, gasoline demand is at an all-time high and refiners are kicking into gear. What traders fear right now is if there is actually a war in Middle East it could slow down the global economy."

US end-user gasoline demand reached a record-high 9.93 million b/d in the week that ended June 14, while refinery net crude inputs rose to nearly 4% above the five-year average, according to US Energy Information Administration data released Wednesday.

"What happened with Iran really stressed the market. Tomorrow may be really interesting as I don't think anyone will want to be short heading into the weekend," Flynn added.

-- Chris van Moessner, christopher.vanmoessner@spglobal.com

-- Edited by Keiron Greelhalgh, newsdesk@spglobal.com