Oil extends longest quarterly rally in a decade on supply risks

Sharon Cho and Grant Smith 10/1/2018

SINGAPORE and LONDON (Bloomberg) -- Oil extended gains in London after the longest quarterly rally in a decade as a slowdown in American drilling added to concern that supply losses around the world will lead to a tight market.

Brent crude rose as much as 0.7%, after front-month futures climbed for a fifth straight quarter. As concerns over a global crunch due to the loss of Iranian oil mount, President Donald Trump and King Salman bin Abdulaziz of Saudi Arabia discussed efforts to maintain supplies. Meanwhile, the number of working oil rigs in the U.S. dropped for a second week, signaling that American output growth may also be slowing.

Oil has rallied to levels last seen in 2014 as supply disruptions from Iran to Venezuela continued to fracture the global market. Top traders forecast crude above $100, while speculation that backup supplies are scarce is keeping investors nervous before American sanctions on the Persian Gulf state come into force next month. Still, BP Plc has cautioned that a rally may not be sustainable as escalating trade tensions between the U.S. and China could hurt demand.

“The supply situation looks fragile indeed,” said Norbert Ruecker, head of macro and commodity research at Julius Baer Ltd. in Zurich.

Brent for December settlement increased as much as 59 cents to $83.32/bbl on the ICE Futures Europe exchange and was at $83.05 at 1:26 p.m. in London. The November contract settled 1.2% higher when it expired on Friday. Front-month futures rose 4.1% last quarter. The global benchmark crude traded at a $9.79 premium to West Texas Intermediate.

WTI for November delivery traded at $73.46/bbl on the New York Mercantile Exchange, up 21 cents. The contract climbed $1.13, or 1.6%, on Friday. Total volume traded was about 49% below the 100-day average.

Following the U.S. president’s latest criticism of the Organization of Petroleum Exporting Countries over high prices, Trump and the Saudi king talked on the phone Saturday about a strategic partnership between the two nations and the growth of the global economy, Al Arabiya TV reported, without providing more details. The White House said “issues of regional concern” were discussed.

In the U.S., working rigs targeting oil fell by three to 863 last week, according to data released by Baker Hughes Friday. The tally in the shale-rich Permian basin of West Texas and New Mexico, dropped by two to 486.

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