IEEJ：June 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (433)June 21, 2019

Iran’s U.S. Drone Shoot-down and International Oil MarketKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanAn event came to further escalate tensions over the Iranian situation. On June 20, Iran’s
Revolutionary Guard announced that it shot down a U.S. military drone invading Iranian airspace.
“Iran made a very big mistake,” U.S. President Donald Trump said in denouncing Iran and giving awarning. Depending on what action the United States would take, their tensions could escalate
further.
The Revolutionary Guard said that it shot down the Global Hawk drone as the plane
intruded into Iran’s airspace over southern Iran’s Hormozgan province early in the morning on June
20 (local time). A U.S. Central Command spokesman admitted that an Iranian surface-to-air missile
shot down the U.S. military drone but noted that the drone did not invade Iran’s airspace but wasattacked in international airspace over the Strait of Hormuz. The spokesman rebutted the Iranianannouncement, describing the attack as groundless. In response to reports about the attack, President
Trump said Iran made a big mistake that the United States would not tolerate. He thus strongly
denounced Iran and indicated that he would take some retaliatory action.
The United States and Iran differed widely over the Iranian airspace intrusion and are
racing to provide evidence. As is the case with attacks on tankers in waters off Oman on June 13, thetwo countries are seeking to find facts regarding the shoot-down. Anyway, Iran’s U.S. drone
shoot-down is destined to escalate bilateral tensions. What action President Trump would take aftervowing not to tolerate the shoot-down would attract global attention. While demonstrating his toughattitude, however, President Trump remarkably indicated his prudent attitude by saying that theshoot-down might not have been intentional and that the situation would differ if a manned airplane
were shot down.
The drone shoot-down greatly shook the crude oil futures market. In New York, the key
West Texas Intermediate futures contract soared by $2.89/bbl from the previous day to $56.65/bbl. InLondon, the key Brent futures contract jumped by $2.63/bbl to $64.45/bbl, scoring this year’s largest
single-day hike. Crude oil futures prices hit this year’s highs in late April when the United Statesindicated its full oil embargo against Iran. Later, however, crude oil prices turned down, with the key
Brent futures price slipping below $60/bbl on June 12. In response to the tanker attacks on June 12,
however, crude oil futures prices rallied, putting an end to their one-month-long weakness. After thesharp increase on June 20, Brent scored a steep rise of about $5/barrel or nearly 10% from thebottom on June 12.
Numerous variables will play key roles in forecasting future crude oil prices, including thefuture course of Iran’s oil exports after their fall to around 0.8 million barrels per day in May under
the full oil embargo, global economic conditions, U.S. shale oil production growth, oil supply
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IEEJ：June 2019○ｃIEEJ 2019disruptions attributable to geopolitical risks in major oil-producing countries other than Iran, theirdegrees, and responses to such disruptions from the OPEC-plus group led by Saudi Arabia.
Depending on the conditions of various variables and their combinations, the supply-demandbalance on the international oil market and crude oil prices will widely differ. Among numerous
variables, however, the geopolitical situation regarding Iran could exert very great influence on theinternational oil market. The key point in this regard would be whether a military clash would occur
and how the military clash would be, irrespective of the probability of the clash.
As indicated by some remarks by President Trump, he is not necessarily sticking to ahardline attitude against Iran or hoping for a military clash or war with Iran. In some sense, he could
consider matters with the next presidential election in mind and give priority to deal-making. Within
the U.S. administration, however, some people including Trump’s National Security Adviser John
Bolton have taken an even more hardline attitude against Iran. In response to the tanker attacks,Washington on June 17 announced a plan to send an additional 1,000 troops to the Middle East.
Including 1,500 troops that Washington vowed in May to send to the Middle East, the United Statesis thus adding a total of 2,500 troops to its forces in the region. Furthermore, the United States has
dispatched an aircraft carrier strike group to the Middle East and deployed additional Patriot
air-defense missile units in the region, stepping up pressure on Iran. As tensions are growing undersuch pressure, events such as the drone shoot-down are expected to escalate the confrontation into anunforeseen or accidental clash that could expand.
The following overviews how the presence or absence and the characteristics of a military
clash would influence the oil market. In the absence of any military clash, tensions would notnecessarily decline. As any clash is avoided even under high tensions, the market may remain
nervous. In this case, other variables than Iran’s geopolitical risks may dominate the oil
supply-demand balance and prices. However, crude oil prices would grow more sensitive to any
news indicating deteriorating tensions, rising sporadically in response to such news. If no downside
risks to the global economy emerge, with the other oil supply and demand variables remaining stable,
crude oil prices may moderately increase from the present levels toward the end of the year, being
supported by the OPEC-plus group’s production cut.
If a military clash occurs, the situation may depend on whether the clash would be limited
or escalated into a prolonged military clash. If the confrontation escalates on some event like thedrone shoot-down and leads to a temporary, limited pinpoint U.S. attack, with Iran remaining
restrained, the scale and duration of the clash may be limited. Even in this case, the clash itself may
trigger buying on the crude oil futures market to boost prices. Even if any clash is limited, it may
affect safe passage through the Strait of Hormuz for a limited period of time, discouraging tankers
from going through the strait. Crude oil prices may then rise from the present range and shoot up
occasionally depending on the degree of the influence on oil supply and market concerns about theinfluence’s seriousness.
If a military clash develops into a full military confrontation accompanied by repeated
retaliations, a geographical expansion and the destabilization of the whole Middle East, oil supply
may be seriously affected. Any safe passage through the Strait of Hormuz may remain difficult until
the confrontation is resolved. The geographical expansion of the confrontation and thedestabilization of the Middle East may affect not only the passage through the Strait of Hormuz and
Iran’s oil production but also supply from other major Middle East oil producing countries (such as2IEEJ：June 2019○ｃIEEJ 2019
Iraq and others) where oil production may decline on foreign companies’ withdrawal from oil
production and physical damage. If the expansion of the military confrontation damages oilproduction facilities in major oil-producing countries, oil supply may further be affected. In such
worst case, crude oil prices may spike and fluctuate at higher range, with the international oil
supply-demand balance tightening. Such development may trigger market-stabilization efforts by theInternational Energy Agency and other organizations and greatly affect the global economy.
At present, it is difficult to forecast future developments, with the situation growing
uncertain. We must further enhance our effort to collect information and analyze various possibilities
in consideration of the ever-changing situation.

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