Oil surges to fresh highs on growing supply worries

Roman Schwartz
May 8, 2018

"It seems that the bureaucratic wheels are turning in Washington to prepare for a sanctions snapback", RBC Capital Markets analyst Helima Croft said in a note, adding that "the extraterritorial nature of us sanctions, which cover energy, shipbuilding, finance, trade, insurance, etc., means that.Iran's oil exports could credibly be curtailed by 200,000-300,000 bpd".

According to Reuters, US West Texas Intermediate (WTI) crude futures rose 80 cents to $70.52 per barrel. Prices climbed 0.3 percent last week. Looming over markets is surging United States output C-OUT-T-EIA , which has soared by more than a quarter in the last two years, to 10.62 million barrels per day.

"The focus of oil markets is now on the USA president's pending decision on the fate of the Iran nuclear deal", said Victor Shum, an oil industry analyst at research firm IHS Markit. "Iran's oil exports could credibly be curtailed by 200,000-300,000 bpd".

Oil prices have surged by double digits since early February, as President Trump has indicated the US might withdraw from the worldwide pact with Iran, under which Iran agreed to curb its nuclear program in return for sanctions relief.

The dollar, which has enjoyed a sudden reversal in fortunes as investors bet on more Fed rate hikes and a slower pace of tightening in the euro zone, rose 0.3 percent versus the euro to $1.1928.

July Brent futures LCOc1 were down 16 cents at $72.97 a barrel by 1100 GMT, after falling almost 3 percent on Tuesday to their lowest in two weeks. The global benchmark crude, which is also on course for the highest close since November 2014, was at a US$5.29 premium to July WTI. Brent crude is now above $75.30.

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Saudi Arabian energy minister Khalid al-Falih said he was concerned about possible shortages of spare crude production capacity.

Trump, while refusing to disclose what he'll do by May 12, repeated his opinion that the existing accord is "a frightful agreement for the United States". Meanwhile, America's European allies continue to back the deal, saying it has been essential to reining in Iran's nuclear program. The reason of this price hike is the deepening economic crisis of Venezuela and the pending decision whether the United States will be re-imposing sanctions on Iran or not.

"If Trump abandons the deal, he risks a spike in global oil prices", said Ole Hansen, head of commodity strategy at Saxo Bank, adding that reintroducing US sanctions could remove 300,000-500,000 bpd of Iranian oil from global supplies.

With global supply already on a downward slope, Iran sanctions could be the last straw to shift the market dynamic, said Leigh Goehring of Goehring & Rozencwajg Associates.

US drillers added nine oil rigs in the week to May 4, bringing the total count to 834, the highest number since March 2015, General Electric (NYSE:GE)'s Baker Hughes energy services firm said in its closely followed report on Friday.

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