Oil Prices Rise Amid Escalating Mideast Tensions and Drone Incidents

Impact of Geopolitical Tensions on Oil Prices

By Yuka Obayashi

Recent Military Incidents

TOKYO, Feb 4 (Reuters) - Oil prices rose on Wednesday, extending the previous day's gains, after the U.S. shot down an Iranian drone and armed Iranian boats approached a U.S.-flagged vessel in the Strait of Hormuz, rekindling fears of an escalation in tension between Washington and Tehran.

Market Reactions and Predictions

Brent crude futures were up 65 cents, or 1.0%, at $67.98 per barrel at 0111 GMT. U.S. West Texas Intermediate crude was at $63.90 per barrel, up 69 cents, or 1.1%.

Trade Agreements and Their Effects

Both benchmarks rose nearly 2% on Tuesday.

The U.S. military on Tuesday shot down an Iranian drone that "aggressively" approached the Abraham Lincoln aircraft carrier in the Arabian Sea, the U.S. military said, in an incident first reported by Reuters.

Separately, in the Strait of Hormuz between the Persian Gulf and the Gulf of Oman, a group of Iranian gunboats approached a U.S.-flagged tanker north of Oman, maritime sources and a security consultancy said on Tuesday.

Meanwhile, Tehran is demanding that its talks with the U.S. this week be held in Oman not Turkey, and that the scope be narrowed to two-way negotiations on nuclear issues only, casting doubt on whether the meeting will proceed as planned.

"Heightened tensions in the Middle East provided support to the oil market," said Satoru Yoshida, a commodity analyst with Rakuten Securities.

OPEC members Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq export most of their crude via the Strait of Hormuz, mainly to Asia. Iran was the third-biggest OPEC crude producer in 2025, according to U.S. Energy Information Administration data.

Oil prices also found support from industry data that showed a sharp drop in U.S. crude stockpiles. Inventories in the top producing and consuming nation fell over 11 million barrels last week, sources said, citing American Petroleum Institute figures.

Official data from the U.S. Energy Information Administration is due on Wednesday at 10:30 a.m. EST (1530 GMT). Analysts polled by Reuters were expecting a rise in crude inventories.

On Tuesday, oil prices were also buoyed by a trade agreement between the U.S. and India that raised hopes of stronger global energy demand, while continued Russian attacks on Ukraine added to concerns that Moscow's oil would remain sanctioned for longer.

"India's trade agreement with the U.S. to halt purchases of Russian crude, along with the ongoing Russia-Ukraine war, is also providing support," Yoshida said, projecting that WTI would likely continue to trade around $65 a barrel for now.

(Reporting by Yuka Obayashi; Editing by Sonali Paul)