Oil prices jump on drone attack on Saudi Aramco facilities

[NEW YORK] Oil prices rose nearly 2 per cent on Tuesday after top exporter Saudi Arabia said explosive-laden drones launched by a Yemeni-armed movement aligned to Iran had attacked facilities belonging to state oil company Aramco.

Brent futures were up US$1.13, or 1.6 per cent, at US$71.36 a barrel by 11.26am EDT (1526 GMT), while US West Texas Intermediate (WTI) crude was up 85 US cents, or 1.4 per cent, at US$61.89 per barrel.

Saudi Energy Minister Khalid al-Falih said Aramco had halted pumping on the East-West pipeline until the damage was evaluated, but that production and exports were continuing without disruption.

"These attacks prove again that it is important for us to face terrorist entities, including the Houthi militias in Yemen that are backed by Iran," Mr Falih said, calling the attack an "act of terrorism" that targeted the world's global oil supply.

Saudi Arabia said earlier that two of its oil tankers were among those attacked off the coast of the United Arab Emirates on Sunday, incidents which ratcheted up tensions in the world's top oil-exporting region.

A US official said Iran was the likely culprit. Iranian officials denied responsibility.

Tehran has been embroiled in an escalating war of words with the United States over stricter US sanctions, which have cut its oil exports and tightened global supply.

A fifth of global oil consumption passes through the Strait of Hormuz from Middle East crude producers to global markets.

"With rising tensions between Iran and the US, and with significant naval build-up in the region, markets are sensitive to news and can be tipped by the smallest signs of a conflict," said Mihir Kapadia, chief executive of Sun Global Investments.

The Organization of the Petroleum Exporting Countries (Opec) said on Tuesday that world demand for its oil would be higher than expected this year as supply growth from rivals including US shale producers slows, pointing to a tighter market if the exporter group refrains from raising output.

US oil output from seven major shale formations, however, is expected to rise to a fresh peak of about 8.5 million barrels per day in June, the US Energy Information Administration said in a report on Monday.

The market was also holding out some hope for flagging US-China trade talks as both sides expressed positive sentiments, which may signal the negotiations are not yet dead.

The talks appeared headed towards success last week but have largely unravelled over US accusations that Beijing sought vast, last-minute changes.

China on Monday ignored a warning from US President Donald Trump and moved to impose higher tariffs on a range of US goods including liquefied natural gas (LNG).

"Volatile prices have remained the theme of today's trading session. Heightened geopolitical tensions in the Middle East and anticipation that the United States and China could still reach an amicable solution to their trade dispute have rendered support to oil prices," said Abhishek Kumar, head of analytics at Interfax Energy in London.

Later Tuesday, traders said the market is expected to focus on US crude stockpiles, which likely declined by 2.1 million barrels last week, the second decline in a row, according to analysts in a Reuters poll.

The poll was conducted ahead of weekly reports from the American Petroleum Institute (API), an industry group, at 4.30pm EDT (2030 GMT) and from the EIA, at 10.30am EDT on Wednesday.

REUTERS