Energy

US oil surges 5.4% to settle at $56.65 after Trump says Iran made a 'very big mistake'

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Oil markets are moving after Trump tweets response to US-Iran drone incident

U.S. oil jumped on Thursday after Iran shot down a U.S. military drone, prompting President Donald Trump to blast Tehran on Twitter and fueling concerns of a conflict between the two countries.

U.S. West Texas Intermediate crude settled up $2.89, or 5.4%, to $56.65 a barrel after surging as much as 6% around 10 a.m. ET. Brent crude, the global benchmark, was up $2.79 — a 4.5% increase — at $64.61 a barrel.

Trump took to Twitter Thursday morning to criticize what U.S. officials say was Iran's attack on a U.S. surveillance drone earlier in the day, saying that Tehran made a "very big mistake."

Trump said later Thursday that the public will "find out" about whether the U.S. plans to retaliate with a military strike, but said he finds it "hard to believe it was intentional."

The drone downing came amid a standoff between Washington and Tehran, stemming from the Trump administration's decision to withdraw from the 2015 Iran nuclear agreement. Prior to the drone attack over the Strait of Hormuz, the U.S. accused Iran of recent attacks on oil tankers in the Persian Gulf region.

The strained relationship has sent crude prices soaring since more than 20% of the world's oil output comes from the Middle East. Any threats to the free flow of oil through key chokepoint the Strait of Hormuz could dampen crude supplies.

Also supporting oil were 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.

"If we didn't have the U.S. resource endowment, oil would absolutely be over $100. Pre-Permania, oil would be above $100" says RBC head of global commodities strategy, Helima Croft.

"We have a drone shot down, we have President Trump now tweeting Iran made a big mistake. I think the market may be waking up to the degree of risk entailed by these incidents," Croft said.

U.S. President Donald Trump speaks during a Cabinet meeting at the White House in Washington, D.C., U.S., on Thursday, June 21, 2018. 
Bloomberg | Bloomberg | Getty Images

Also boosting oil on Thursday was a larger-than-expected decline in U.S. crude inventories and the potential for prolonged supply restraints by the Organization of the Petroleum Exporting Countries.

After surging to near two-year highs, U.S. crude stocks fell by 3.1 million barrels last week, compared with analyst expectations for a draw of 1.1 million barrels, the Energy Information Administration said on Wednesday.

OPEC and its allies including Russia agreed this week to meet on July 1-2, ending a month of wrangling about the timing of the meeting.

The coalition known as OPEC+ will discuss whether to extend throughout 2019 a deal on cutting 1.2 million barrels per day of production. The deal expires at the end of this month.

— Reuters and CNBC's Patti Domm contributed reporting.