Oil prices hit six week high on US crude stock data, Middle East tensions

oil prices
Oil prices hit a six-week high on Thursday after the US Energy Information Administration reported US crude stocks fell unexpectedly last week and tensions in the Middle East continued to escalate.  AFP photo by Nicholas Kamm.

Oil prices rose as tensions in the Middle East escalated following a meeting between Saudi Arabia’s Crown Prince Mohammed bin Salman and US President Donald Trump on Tuesday, raising speculation that sanctions against Iran could be reimposed.  AFP photo by Nicholas Kamm.

Crown prince says that if more isn’t done to prevent Iran from acquiring nuclear weapon, Saudi Arabia will pursue its own, as soon as possible

Oil prices hit a six-week high in early trading on Wednesday on a surprise decline in US crude stocks and an increase tensions in the Middle East which could impact the region’s supply of crude.

Weekly data from the US Energy Information Administration showed US crude stocks fell by 2.6 million barrels last week.  Analysts polled by Reuters prior to the release of the data  anticipated an increase in inventories of 2.5 million barrels.

By 2:34 p.m. EDT, benchmark Brent was up $1.88 to $69.01/barrel.  Since hitting a two-month low in early February of $61.77, Brent has increased by 11.5 per cent.

US WTI jumped $1.64/barrel to $65.18 and the Canadian Crude Index rose almost 5.22 per cent to $43.37.

“A few things happened,” Jim Ritterbusch, president of Ritterbusch and Associates, told Reuters, referring to the data released by the EIA.

“Crude imports dropped by half a million barrels per day, that contributed to the draw. We saw refinery runs increase more than expected by around 400,000 barrels per day so that ate up a lot of crude. And exports were up slightly,” he said.

As well, the heat was turned up on already burbling Middle East tensions when Saudi Arabia’s Crown Prince Mohammed bin Salman met with US President Donald Trump on Tuesday.   The meeting raised speculation that the US could reimpose sanctions against Iran due to the Trump administration’s unhappiness with the 2016 multi-nation deal.

Ritterbusch told Reuters “So even though you do see signs that the market is lax on the physical side, do you go aggressively bearish when you have the potential for something happening between the U.S. and Iran?”

As well, the nomination of Mike Pompeo by Trump to replace Rex Tillerson as US Secretary of State is seen as a risk to oil markets.  Pompeo strongly opposed the Iran nuclear deal when he was a member of Congress.

The bullish sentiment in the market began increasing with the dismissal of Tillerson.

“Tillerson’s departure signaled that President Trump could possibly pull out of the Iran nuclear deal, which could lead to re-imposition of sanctions against Iran,” said analysts Drillinginfo in its latest market update.

“Re-imposing sanctions on Iran could significantly decrease the crude exports by that country, which would support the prices moving forward and help Saudi Arabia in its quest to raise prices ahead of the Saudi Aramco IPO. Prices also got support from rising tensions between Saudi Arabia and Iran.”

Saudi crown prince Mohammed bin Salman, ahead of his visit to the US, accused Iran of waging proxy wars across the Arab world, and stated that if more isn’t done to prevent Iran from acquiring a nuclear weapon, his country will pursue its own, as soon as possible, said Drillinginfo.

Additionally, sharply declining Venezuelan production is supporting prices. Venezuela’s February output was down more than 0.5 MMBbl/d compared with a year ago, according to IEA.

According to energy consultancy FGE, new US sanctions on Iran could lead to a decline of Iranian crude exports of between 250,000-500,000 barrels per day (b/d).  Since the sanctions were lifted in 2016, Iran has exported between 2.0 million to 2.2 million b/d.

“… Oil sanctions against Iran would have a greater impact in an undersupplied market than in an oversupplied one. The unexpected 2.7-million barrel decline in U.S. crude oil stocks last week, as reported by the API, is likely to confirm market participants in this view. The oil price strength could therefore continue in the coming days,” Reuters reports Commerzbank analysts said in a note.

Investors remain concerned about quickly rising US production which has jumped over 20 per cent since mid-2016 to 10.38 million b/d.  The United States is on track to become the world’s largest oil producer this year.


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