Oil Trades Near $71 as Rising Supply Counters Middle East Risk

After the plans for the U.S. to pull out of the Iran nuclear deal became known, oil prices surged over the uncertainty of what would happen to Iran's oil industry if the United States reimposed sanctions, limiting Iran's production.

Gasoline demand is up 0.7 percent from previous year over the past four weeks to 9.4 million bpd.

Growth in US output, meanwhile, has tamed price moves for USA benchmark crude in recent sessions, preventing it from notching a fresh multiyear high.

Even though shale is set to grow and the U.S.is exporting crude at high levels, the rest of non-OPEC is static despite higher oil prices.

Global inventories of crude oil and refined products dropped sharply in recent months owing to robust demand and OPEC-led production cuts.

Michael Wittner, analyst at Societe Generale, forecasts USA sanctions will remove 400,000 to 500,000 bpd of Iranian crude from the global market.

Oil prices have dipped again, despite OPEC production cuts and the potential for Iranian exports to be hampered by new U.S. sanctions. Clogged pipelines have hit key U.S. oil grades, including in west Texas, where the discount to United States crude is near its widest in three years. Energy economist Phil Verleger says "we could be in store for the greatest market price disruption ever" and sees Brent possibly reaching $120 this summer.

OPEC is forecasting USA liquids production this year to increase by 1.5 million b/d, with 94% from tight crude and unconventional natural gas liquids, on increased investments and upgraded completion metrics, versus 90% in 2017.

"That absolute plunge in Venezuelan production ... just highlights how tenuous the market is in terms of the supply-and-demand balance", said John Kilduff, a partner at Again Capital LLC.

This week's inventory cycle has been a head-scratcher for participants in the energy markets. Now, they are already 15 percent lower than year-ago levels, thanks in large part to OPEC's cuts specifically targeting the US market. According to Goldman, global oil demand growth in the first quarter of 2018 is likely to have seen the strongest yearly growth since the fourth quarter of 2010. Spot crude prices are at their steepest discounts to futures prices in years due to weak demand from refiners in China and a backlog of cargoes in Europe. However the IEA - which advises oil-consuming nations - has warned that prices are high enough to hurt consumption, and trimmed its forecasts for demand growth.

So while $80 might be Saudi Arabia's purported magic number, its spell might prove short-lived.

French energy giant Total announced it would withdraw from a Iranian gas deal before the end of the year, unless it gets a waiver. This creates a situation whereby either Europe will attempt to change the mindset of the USA, or they have to withdraw any investments that have been recently made into the Iranian economy. It will take up to 180 days to allow Iranian oil customers and other companies involved in doing business with Tehran to make plans.

  • Zachary Reyes