Oil struggles near $68 as inventory gain overshadows Iran fears

By Grant Smith on 5/3/2018

LONDON (Bloomberg) -- Oil’s recovery, buoyed by potential supply risks, was capped by rising U.S. inventories while President Donald Trump neared a decision on whether to reimpose sanctions on Iran.

Futures in New York fell 0.7% after rising 1% Wednesday, the biggest gain in two weeks. U.S. data showed that stockpiles last week climbed the most since January, beating estimates. Trump’s deadline to decide on Iran is just over a week away, and traders are keeping a close watch as sanctions could hit the OPEC nation’s crude exports.

The speculation on Iran and escalating geopolitical risks have driven crude futures in New York and London more than 10% higher over the past two months. At the same time, the Organization of Petroleum Exporting Countries and Russia seem determined to keep cutting production even after achieving their main target following 16 months of output curbs to clear a global glut.

“Our base case still calls for a balanced oil market in 2018” as “non-OPEC supply growth will outpace demand growth,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich. “The growing supply uncertainties are the key reasons why we believe the oil market has priced in a risk premium.”

West Texas Intermediate crude for June delivery was down 45 cents at $67.48/bbl on the New York Mercantile Exchange at 9:13 a.m. local time, after advancing 68 cents on Wednesday. Total volume traded Thursday was 16% above the 100-day average.

Brent crude for July settlement slipped 64 cents to $72.72/bbl on the London-based ICE Futures Europe exchange, after adding 0.3% on Wednesday. The global benchmark crude was at a $5.37 premium to July WTI.

U.S. data

Yuan-denominated futures for September delivery were up 0.8% at 447 yuan a barrel in afternoon trading on the Shanghai International Energy Exchange. The contract dropped 0.2% to 443.5 yuan on Wednesday.

The Energy Information Administration reported that U.S. crude inventories rose 6.22 MMbbl last week, compared with a 1.23-MMbbl gain estimated in a Bloomberg survey. Stockpiles in the nation’s oil-storage hub of Cushing, Oklahoma, increased 416,000 bbl, and those on the logistically isolated West Coast led with a 4.88-MMbbl build, the most since 1999.

Trump says no final decision has been made on the deal between Iran and world powers that eased restrictions on the OPEC producer’s crude exports in exchange for curbs on its nuclear program. Still, the U.S. administration has in recent days signaled it’s more likely to leave the agreement.

Secretary of State Mike Pompeo said Wednesday that the U.S. is considering next steps for the “flawed” deal. With Trump in the past calling the pact “insane,” a pull-out would drive up oil prices as it may disrupt sales by OPEC’s third-largest producer, according to Citigroup Inc. and Standard Chartered Plc.

Iran will “not renegotiate or add on to a deal we have already implemented in good faith,” the nation’s foreign minister Javad Zarif said in a YouTube post Thursday.

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