The Trump administration has set a November 4 deadline for customers of Iranian crude to halt their purchases. The looming Iran sanctions, which are expected to take 1 million barrels per day out of the market, are now pressuring oil prices.
Iran sanctions, rising demand in China boosting oil prices
Oil traders bracing for an oil supply crunch due to the Trump administration’s looming sanctions on Iranian crude exports are buying up an overhang of unsold crude, according to a report by Reuters.
As a result of the increased sales, oil prices rose on Thursday.
By 2:09 p.m., EDT, Brent crude was up up 0.93 per cent to $78.18 and US West Texas Intermediate rose 1.29 per cent to $70.41/barrel. The Canadian Crude Index climbed 2.39 per cent to $44.64.
Over 1 million b/d of Iranian crude will be off the market once the sanctions are in place and Iran’s customers are scurrying to find new suppliers ahead of the re-imposition of the sanctions on Iranian crude exports ordered by President Trump in May.
Millions of unsold barrels of crude that had accumulated in northwest Europe, the Mediterranean and West Africa in July and August are being bought up.
Reuters reports that a months-long surplus of crude in the West African market that had forced prices to their lowest levels in months has all but disappeared.
Traders reported one week ago that there were 30 cargoes of leftover crude from the August and September loading schedules, or about 930,000 barrels per day (b/d). Now, the overhang is at a handful of unsold cargoes.
Demand for October-loading of Angolan crude, preferred West African grade of Chinese refiners, has been more robust than that of September.
“The overall situation … is that US sanctions toward Iran are now increasingly kicking in, which will help to dry up the physical crude oil market and place it back into solid backwardation,” Reuters reports SEB head of commodities Bjarne Schieldrop said in a note this week.
“This will shift the front end Brent crude oil price into the higher $70s range with a touch of $80s.”
Brent futures are at their closest to backwardation in almost a month as the Iran sanctions date nears. The front-month October contract is just 35 cents below November, nearly half of what it was in late July.
In Europe, there remains a surplus of crude in the North Sea market so large that traders had to resort to keeping crude on tankers to handle the oversupply.
But, according to Reuters, this surplus is also disappearing. Just a few days ago, there was about 20 million barrels of oil in floating storage, but there is now about 16 million barrels of crude stored in tankers in the area.
There were concerns that demand for crude in China was falling, however, consumption by the country’s independent, or teapot, refineries jumped in August to about 1.4 million b/d from near-record lows in July. A number of teapot refineries were shuttered during the summer for maintenance.
Iran sanctions coupled with strong crude demand from Asia as well as years of underinvestment in the oil industry due to low prices are signs to some big investors that the oil market is on the cusp of a rally.
“We believe the bull market in oil … is set to dramatically accelerate to the upside. Stay long oil and oil-related investments,” Reuters reports Leigh Goehring and Adam Rozencwajg, of New York natural resources asset managers Goehring and Rozencwajg Associates wrote.
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