Oil prices sank on Wednesday after President Donald Trump said Iran "appears to be standing down" in the Middle East and that Washington would impose sanctions on Tehran instead of another military strike as feared by some investors.
Trump's comments Wednesday morning came after Iran's rocket attack on American forces in Iraq failed to destroy major energy infrastructure that could have disrupted global crude supply. Trump also confirmed in his White House speech that no Americans were harmed during the bombing.
Tehran launched more than a dozen ballistic missiles against multiple military bases housing U.S. troops in the early hours of Wednesday morning, according to Pentagon officials.
International benchmark Brent crude fell 4% to $65.54 a barrel, a marked reversal after at first climbing more than 4% immediately after news of the attack. The initial surge in response to news of the attack sent Brent up to a high of $71.75 per barrel — its highest since September.
U.S. West Texas Intermediate crude dropped $3.09, or 4.9%, to $59.61 a barrel, marking its first time below $60 a barrel since Dec. 16. That marked a sharp fall from WTI crude's initial 4.5% spike in overnight trading, when it hit $65.65 a barrel and its highest level since April.
Though Trump promised the U.S. would respond to Iran's attack with "punishing economic sanctions," traders took the news as more dovish and a move toward de-escalation.
"The Iran fever has broken in a significant way," said John Kilduff, Founding Partner at Again Capital. "We were all wondering if there would be some off-ramp achieved or taken by the various sides: The Iranians took it first with their limited strike, President Trump just took it now. As a result of that, we have a lot less fear in this market."
Following an initial overnight spike, oil retreated from highs earlier in the session to turn negative as it became clear no energy infrastructure was targeted. There were no reports of casualties so far either, leading traders to believe maybe there will not be a wider conflict between the U.S. and Iran that could hamper oil flows.
The missile strikes came just hours after the funeral of Iranian Gen. Qasem Soleimani on Tuesday. The military commander was killed by a U.S. drone at Baghdad International Airport late last week, fueling already-bitter tensions between Washington and Tehran in the region.
The latest escalation had sparked fears of a widening conflict in the Middle East, with energy market participants increasingly concerned the fallout could soon disrupt regional crude supplies. But tamer comments throughout Wednesday from both the White House and a member of the Organization of the Petroleum Exporting Countries (OPEC) helped convince traders that the worst-case scenario had been avoided.
"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."
Meanwhile, the United Arab Emirates Energy Minister Suhail al-Mazrouei told Reuters earlier Wednesday that he saw no imminent risk to oil passing through the critical Strait of Hormuz.
"We will not see a war," he said from UAE capital Abu Dhabi. "This is definitely an escalation between the United States, which is an ally, and Iran, which is a neighbor, and the last thing we want is more tension in the Middle East."
The relatively mild comments from Trump are key, said James Eginton, investment analyst at Tribeca Investment Partners.
"The reason the oil price came down is because Trump sent out a tweet," he told CNBC's "Capital Connection" on Wednesday morning. "As so often happens in financial markets since the Trump administration came in, Twitter is one of the most useful sources of working out commodity price directions as much as anything."
Though no energy assets have been targeted, oil market strategists cautioned that even the perceived threat of an attack could persuade some of the globe's largest oil shipping companies to steer clear of the critical Strait of Hormuz, through which about one-third of the world's shipped oil passes.
Companies taking early precautions include Saudi state tanker operator Bahri, which has reportedly suspended ship transits through the strait following the Iranian attacks on U.S. military bases. The Wall Street Journal reported that a note from Bahri to shipping brokers and clients said the "Saudi flag has advised to refrain from transiting through the Hormuz Strait until 1600, Jan. 8, Saudi time."
Oil prices extended their decline Wednesday morning after the government reported morning that U.S. inventories of crude oil rose unexpectedly last week, with stockpiles climbing 1.2 million barrels to 431.1 million barrels.
That puts inventories around its five-year average for this time of year, the EIA said. Economists polled by Dow Jones had predicted crude stockpiles would drop 3.2 million barrels from the prior week.