Planned Iran sanctions, tight supply send oil to new multi-year high

Erika Holt
May 16, 2018

July WTI crude oil settled at $70.99, up $0.31 or +0.44% and July Brent crude oil finished at $78.23, up $1.11 or +1.42%. Politics is at the heart of the recent increase.

Oil prices rose to multiyear highs on Tuesday, bolstered by signs that major oil producers are still committed to reducing supply and the rising specter of USA sanctions against Iran. Most cartel member governments are eager to boost oil prices since their economies are highly dependent on oil revenues.

It could take five years for Saudi Arabian oil production to return to levels from two years ago and that leaves overall GDP constrained, Moody's said.

Opec also revised its estimate of non-Opec supply growth in 2018, increasing it by 10,000 bpd to 1.72 million bpd. Part of the "success" of these cutbacks is the result of economic and political instability in many oil producing countries.

The data from OPEC show that the Organization for Economic Cooperation and Development (OECD) commercial oil stocks in March fell by 12.7 million barrels from previous month to almost 2.83 billion barrels. Still, the cartel's leader Saudi Arabia and some analysts believe oil prices can rise higher still before they start hurting production. South Sudan oil production has fallen from 500,000 to 130,000 barrels per day.

They've soared in the past few weeks ahead of President Donald Trump's decision on the Iran nuclear deal and continued to rise after he announced the USA was dropping out of the deal.

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The Saudis themselves reported total production of 9.868 million barrels a day in April, down by about 39,100 compared to March.

The company's revenues increased "on the back of higher crude oil prices and optimization in sales channels despite the remaining constraints in production within the OPEC+ Agreement", it said on a statement issued on Monday.

Analysts wrote "Looking into the next 18 months, we expect global oil supply to demand balances to tighten driven by the ongoing collapse in Venezuelan output". WTI's discount to Brent was as much as $7.28, its widest since December 12 on surging USA output.

Otunuga told Arab News that the price of oil has further room to rise this week.

Brent crude was up 20 cents at $77.32 a barrel by 1315 GMT and United States light crude rose 10 cents to $70.80.

"Germany has said it will protect its companies from US sanctions, Iran has said French oil giant Total has yet to pull out of its fields and all the while it seems the Chinese are ready to fill the void created by the U.S", said Greg McKenna, chief market strategist at AxiTrader. This domestic production increase will have a significant moderating influence on future oil prices.

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