Brent crude trades at $10 premium to U.S. oil amid Iran risk

By Grant Smith and Sharon Cho on 9/11/2018

LONDON and SINGAPORE (Bloomberg) -- Brent crude, the global oil benchmark, traded at more than a $10/bbl premium to U.S. futures as fears of lost Iranian output buoyed one grade and a supply glut undermined the other.

The premium for London-traded Brent, which is more sensitive to global supply disruptions than American prices, was at its highest in more than two months. South Korea has become the first of Iran’s top-three oil customers to cut imports to zero before U.S. sanctions take effect in November. In the U.S, crude inventories at the storage hub of Cushing, Oklahoma, may have increased for a fifth week, according to estimates compiled by Bloomberg.

“Bullish Europe, bearish U.S.” is the overall sentiment in the market, said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. “The impact of the U.S. sanctions on Iran is firmly being felt” in Europe but “the picture could not be more different on the other side of the Atlantic Ocean.”

Crude prices in London have been supported by the U.S. government’s efforts to constrict Iranian oil sales as it reimposes sanctions after President Donald Trump quit a nuclear deal with the Islamic Republic in May. In the U.S., crude is piling up in key producing areas as booming shale output overwhelms the capacity of pipelines to transport it to refineries and export terminals.

Both New York and London-traded contracts were buoyed on Tuesday as speculation swirled over whether a giant hurricane approaching the U.S. East Coast would disrupt supplies and drive up fuel prices.

While Hurricane Florence is likely to miss refineries in the Gulf Coast and Philadelphia areas, it could affect the Colonial Pipeline, the main conduit for moving gasoline and diesel from Houston to New York. Drivers may also fuel up before the storm, which could potentially shut distribution terminals in the mid-Atlantic.

West Texas Intermediate for October delivery traded at $67.87/bbl on the New York Mercantile Exchange, up $0.33 in London. The contract dropped $0.21 to $67.54 on Monday. Total volume traded was about 34% below the 100-day average.

Brent for November settlement rose $0.67 to $78.04/bbl on the ICE Futures Europe exchange. The global benchmark crude’s premium to WTI for the same month was at $10.31, increasing further after closing at the highest level in more than two months on Monday.

October gasoline futures added 1.1% to $1.9805/gal, after sliding 0.6% on Monday.

Hurricane Florence, expected to hit the coast between South Carolina and Virginia by the end of this week, could spur brief but probably dramatic spikes in pump prices, according to motoring group AAA. Data provider GasBuddy expects any potential jump to be limited to the Carolinas and Virginia.

“The industry is focusing on Hurricane Florence, and while there are no refineries in the path of the storm, the Colonial Pipeline is prepping for possible power disruptions,” said Stephen Innes, Singapore-based head of trading for Asia Pacific at Oanda Corp. “It could lead to pressure at the pump in the northeast.”

Oil Market News

U.S. nationwide crude inventories may have fallen 2.25 MMbbl last week, according to a Bloomberg survey of analysts ahead of government data due to be released on Wednesday. Brent futures for November settlement remained $1.09/bbl higher than those for February, after the spread closed at the widest since June on Monday. The pattern where near-term prices trade at a premium to later contracts, known as backwardation, typically reflects signs of supply scarcity.

State-run producer Saudi Arabian Oil Co., known as Aramco, is said to supply full contractual crude volumes to at least three buyers in Asia for October. Libya’s National Oil will carry out operations as usual across the country after security forces quashed a deadly attack on the state company’s headquarters in the capital Tripoli. The nation holds Africa’s largest proven reserves of crude.

 

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