Oil gains as harder U.S. stance on Iran overshadows Saudi pledge

By Grant Smith on 6/27/2018

LONDON (Bloomberg) -- Oil rose to a one-month high as the risk of a supply crunch continued to buoy markets, with a U.S. demand that Iran’s customers halt their imports overshadowing Saudi Arabia’s promise to boost output.

New York futures gained as much as 1.3%, after advancing 3.6% on Tuesday. Renewed U.S. sanctions that may curb OPEC member Iran’s exports, a Canadian oil-sands outage and turmoil in Libya have lifted prices. Meanwhile, Saudi Arabia is said to plan ramping up production, a move that would strain its spare capacity at a time when the market is already coping with falling Venezuelan output and shrinking American inventories.

Crude is approaching the highs of May as a decision by the Organization of Petroleum Exporting Countries and its allies to boost output by 1 MMbpd is seen “ a little short” of what’s required to ease supply concerns. U.S. President Donald Trump’s administration is demanding that Iran’s oil customers end imports by a Nov. 4 deadline and doesn’t want to offer any extensions or waivers, as it targets the Islamic Republic’s economy.

“We find ourselves in a period of erratic global politics that injects a considerable amount of volatility,” said Norbert Ruecker, head of macro and commodity research at Julius Baer & Co. “The stage is set for further geopolitical confrontation.”

West Texas Intermediate crude for August delivery rose as much as 91 cents to $71.44/bbl on the New York Mercantile Exchange, and traded at $71.40 as of 9:14 a.m. local time. The contract rose $2.45 to $70.53 on Tuesday. Total volume traded Wednesday was about 8% below the 100-day average.

Brent futures for August settlement traded at $77.09/bbl on the London-based ICE Futures Europe exchange, up 78 cents. Prices on Tuesday added $1.58 to close at $76.31. The global benchmark crude was at a $5.59 premium to WTI.

State oil giant Saudi Aramco aims to raise supplies next month to about 10.8 MMbpd, according to people briefed on Saudi policy, following pressure from Washington to fill any supply gaps and alleviate high prices before the American midterm elections in November. The U.S. administration wouldn’t rule out waivers or extensions to the November deadline for Iran’s customers, yet isn’t discussing them either, a State Department official said.

“Saudi Arabia faces the daunting, if not impossible, task of managing the oil market; prices are going to stay elevated,” said Victor Shum, a vice president at consultants IHS Energy. “The uncertainty over Iranian crude supply is going to cast a shadow over the oil market. The cut in supply may be even bigger than thought, depending on how successful the U.S. is in getting countries not to buy Iranian oil.”

In Libya, supply concerns intensified after forces loyal to Khalifa Haftar, a commander in the politically divided nation’s eastern region, turned over ports with a combined export capacity of 800,000 bpd to the National Oil Corp. in Benghazi, in the east. The transfer of ports, including Libya’s biggest, threatened to unsettle markets just days after OPEC agreed to raise output.

A market structure known as backwardation persisted as WTI for August settlement was about $1.40 higher than the September contract, signaling a shortage after a Syncrude Canada oil-sands outage. Meanwhile, Brent for near-term delivery was only about 17 cents higher than later cargoes, a much smaller premium than in the U.S. market.

Crude prices were also supported by an American Petroleum Institute report that was said to show U.S. inventories shrank by 9.23 MMbbl last week, bigger than a 3-MMbbl drop estimated in a Bloomberg survey. If that’s confirmed by Energy Information Administration data later on Wednesday, it will mark a third week of declines.

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