Oil rises towards $65 on fears of US attack on Iran

Prices continue to spike on back of growing tensions in Middle East after Iran shot down US drone

LONDON: Oil prices rallied towards $65 per barrel on fears of a US military attack on Iran that would disrupt flows from the Middle East, which provides more than 20% of the world's oil output.

Brent crude was up $0.42, or 0.66%, at $64.87 a barrel by 0850 GMT. The global benchmark jumped 4.3% on Thursday and was up around 5% for the week, in its first weekly gain in five weeks.

US West Texas Intermediate crude was up $0.21, or 0.38%, at $57.28 a barrel. The US benchmark surged 5.4% on Thursday and was on track for a 9% increase this week.

"Crude prices are spiking on increased Middle East tensions after Iran shot down a US drone in what the US claims is international airspace," said Jason Gammel from Jefferies.

Iran said it had shot the drone over its territory.

Iranian officials told Reuters on Friday that Tehran had received a message from US President Donald Trump through Oman overnight warning that a US attack on Iran was imminent.

The officials said they had responded by saying that any attack would have regional and international consequences. They also said Supreme Leader Ayatollah Ali Khamenei was against talks but said they would convey the US message to him.

The New York Times reported on Friday, citing sources, that Trump had approved military strikes against Iran but pulled back from launching the attacks.

Tensions have been on the rise because US sanctions on Iran have severely reduced oil exports from OPEC's third largest producer and Washington has blamed Tehran, which denies any role, for a series of attacks on oil tankers in the Gulf.

"There is no doubt that a severe disruption to the transit of oil through this vulnerable route would be extremely serious," said consultancy FGE Energy in a note.

The demand-side outlook has also improved, said Jefferies with appetite for risk assets rising after the European and the US central banks signalled possible rate cuts this week.

A weaker greenback tends to support oil prices because crude is usually priced in dollars.

Another macroeconomic factor supporting prices is the plan by Beijing and Washington to resume talks to resolve a trade tariff war that has hit economic growth prospects.