Published: Tue, May 15, 2018
Money | By Ethel Goodwin

Oil Rises to New Three-Year Highs

Oil Rises to New Three-Year Highs

Worldwide benchmark Brent crude futures for the July delivery rose by 0.8 percent to $78.93 per barrel, marking a new high after hitting a 3-1/2 year high of $78.53 during the previous session.

The production growth may be far from over, contributing to USA crude's discount to Brent, analysts said. "Plus we see a high likelihood of OPEC working with Russian Federation in 2019 to set a floor on oil prices".

Meanwhile, output from third-largest Opec producer Iran is uncertain on renewed U.S. sanctions. If prices were to move higher, that could dampen demand.

John LaForge, head of real asset strategy at the Wells Fargo Investment Institute, agrees.

Now the United States has announced it will impose sanctions on Iran over its nuclear programme, raising fears that markets will face shortages later this year when trade restrictions come into effect. "Around a million barrels of oil a day is likely to disappear from global oil markets if the USA sanctions on Iran bite", said Greg McKenna, chief market strategist at futures brokerage AxiTrader. But how much those exports fall will depend on the reaction of the countries that import Iranian oil: China, France, Russia, U.K.

Oil held near $71 a barrel on heightened political risks in the Middle East following unrest in Gaza and the return of sanctions against Iran. US crude edged up 0.2% to $70.82. And Iran could try to block oil shipments from the Mideast through the Strait of Hormuz, although the US naval presence in the area would make that hard to do.

Michael Wittner, an analyst at Societe Generale, forecasts US sanctions will remove 400,000-500,000 BPD of Iranian crude from the global oil market, Reuters reported. An OPEC source told Reuters last week that Saudi Arabia "will not in any way act independently of its partners". American measures could cut the Persian Gulf nation's crude exports, and traders are watching whether OPEC and its allies will end their agreement to curb supply and increase production instead to fill in the gap.

"The Saudis are keen on holding production cuts, enjoying high prices, but are increasingly under pressure from Russian Federation to bring back production", says Eric Lee, energy strategist at Citigroup.

At the same time, China's domestic crude oil production has been languishing near June 2011 lows in the first quarter this year, prompting higher imports to meet growing demand.

Global economic growth forecasts were left unchanged at a 3.8% overall GDP increase for the year, while OPEC revised up its world oil demand estimate by 25,000 bbl/day to 1.65m bbl/day for 2018 on the back of firmer OECD data.

April crude imports from Saudi Arabia, South Korea's top crude oil supplier, fell 6.9 percent to 3.32 million tonnes, or 810,564 bpd, from previous year.

According to a report from OPEC, the global oil glut has been virtually eliminated.

The global oil picture has dramatically changed in the past year.

- Global oil supply is tightening.

The U.S. decision to leave the Iran nuclear deal had largely been priced into the oil markets ahead o the announcement.

"By 2019, U.S production can pick up as pipelines are expanded and OPEC and Russian Federation can bring back production", says Lee.

Additionally, the market retreated as the U.S. Dollar strengthened against other currencies to the highest since December.

Speaking to analysts, Scaffardi said the lack of Iranian crude supplies would be a problem in terms of prices but not volumes. That's a big a if in the political current environment.

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