Oil prices rise on Middle East tensions, healthy demand

CNBC

  • Oil prices rose on Wednesday, supported by tensions in the Middle East and healthy global demand.
  • Rising U.S. output from the United States continued to weigh on markets.
  • Saudi Arabia’s Crown Prince Mohammed bin Salman arrived in to Washington for a state visit.

Pump jacks in an oil field over the Monterey Shale formation near Lost Hills, Calif.

Getty Images
Pump jacks in an oil field over the Monterey Shale formation near Lost Hills, Calif.

Oil prices rose on Wednesday, supported by tensions in the Middle East and healthy global demand , although rising U.S. output from the United States continued to weigh on markets.

U.S. West Texas Intermediate (WTI) crude futures were at $63.82 a barrel at 0027 GMT, up 28 cents, or 0.4 percent, from their previous close.

Brent crude futures were at $67.66 per barrel, up 24 cents, or 0.4 percent.

Saudi Arabia’s Crown Prince Mohammed bin Salman arrived in to Washington for a state visit, raising market speculation the United States could reimpose sanctions on Iran, following rewnewed criticism of the 2015 nuclear deal.
“The presence of the Saudi Crown Prince MBS in Washington and his clear agenda to ramp up pressure on Iran, has for me, been the key driver… of oil, which rose strongly,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

Energy consultancy FGE said it was likely that the United States would reimpose sanctions on Iran soon, resulting in a 250,000 to 500,000 barrels per day (bpd) drop in its exports by year-end.

Trump meets with Saudi crown prince

Trump meets with Saudi crown prince  

Analysts also pointed to healthy economic growth and a weak dollar as oil price drivers.

In a sign of healthy demand, U.S. crude stocks fell by 2.7 million barrels in the week ended March 16 to 425.3 million, as refineries boosted output, the American Petroleum Institute said on Tuesday.

“The global economy is humming, and robust demand solidly underpins commodity prices. The soft dollar and a bullish market mood have been equally supportive elements,” said Norbert Ruecker, head of macro and commodity Research at Swiss bank Julius Baer.

A weaker greenback makes imports of dollar-denominated crude cheaper for countries using other currencies at home, potentially spurring demand.

Despite this, he said seasonally low demand at the end of the northern hemisphere winter season meant he had “a rather cautious near-term outlook on commodities.”

Looming over oil markets has been surging U.S. crude oil production, which has risen by more than a fifth since mid-2016, to 10.38 million barrels per day (bpd), pushing it past top exporter Saudi Arabia and within reach of Russia’s 11 million bpd.

Analysts say U.S. producers are not yet at their limits.

Some say U.S. producers are holding back expansion in order to prevent another price crash, as seen between 2014 and 2016.

“The larger players are holding back capital expenditures in an attempt to avoid past mistakes… Despite a substantial growth in the U.S. production, there is no effort to produce to the max with no regard to the market,” said energy consultancy FGE in a note.

Saudi power struggle means oil prices will hit ‘$70 before $50′

CNBC

  • Oil prices are more likely to rise toward $70 a barrel than fall back to $50 a barrel after a purge of Saudi princes and ministers, one energy analyst told clients Monday.
  • The crackdown is a sign that Crown Prince Mohammad bin Salman is consolidating power as he attempts to reshape the Saudi economy.
  • Others say little has changed in Saudi oil policy following the crackdown.

Saudi Arabia’s economic reform plans are behind anti-corruption crackdown: Gamble  

Oil prices are more likely to rise toward $70 a barrel than sink back to $50 in the wake of the biggest political shakeup in Saudi Arabia in decades, according Roberto Friedlander, head of energy trading at Seaport Global Securities.

Crude futures rose to highs going back to mid-2015 overnight after Saudi Crown Prince Mohammad bin Salman orchestrated the arrest of several princes and ministers over the weekend. The Saudis framed the purge as a crackdown on corruption, though some analysts said it was likely a move by bin Salman to consolidate power as he embarks on an ambitious effort to reshape Saudi Arabia’s economy.

Following three years of soft oil prices, the Saudis have drained budget surpluses and now need to return to economic growth in order for the crown prince to survive, Friedlander said in an email briefing on Monday. The purge of powerful figures like Prince Miteb bin Abdullah, the former head of the National Guard, appears calculated to remove opposition to bin Salman’s plans, he said.

“The Saudi Situation means $70 before $50,” Friedlander wrote.

Bin Salman, who is widely expected to soon become king, is trying to generate growth by transforming the Saudi economy. Selling off a stake in state oil giant Saudi Aramco next year is the cornerstone of the plan, called Vision 2030.

Saudi Arabia's Mohammed bin Salman (2nd L) on April 19, 2017 in Riyadh, Saudi Arabia.

Saudi Arabia arrests powerful royals and businessmen in corruption crackdown  

Steady oil prices are seen as critical to the share sale. Saudi Arabia is spearheading production cuts among OPEC and other oil exporters in order to shrink global crude stockpiles, which supports prices.

“The Saudis CAN’T afford a renewed decline in prices or a decline in oil revenues,” Friedlander said, adding “they would certainly prefer to risk tightening the oil market too much and see prices hit $70, rather than risk letting them slip back to $50,” Friedlander said.

International benchmark Brent crude recently topped $60 a barrel on signs the oil market is tightening. Brent rose as high as $62.90 on Monday, while U.S. West Texas Intermediate crude peaked at $56.28 — both highs going back to July 2015.

A Brent crude price of $60 a barrel provides the optimal conditions for many of bin Salman’s initiatives to overhaul the economy, according to Helima Croft, global head of commodity strategy at RBC. She expects little to change immediately in terms of Saudi oil policy following the weekend’s events.

“MBS seems strongly committed to anchoring the OPEC agreement deep into 2018 and moving ahead with the Aramco sale,” Croft said, using an acronym for Mohammad bin Salman.

This scholar says the Saudi corruption crackdown is about economic reforms  

Prior to the crackdown, Barclays said Brent crude appears to be consolidating around $60 a barrel and could make a move toward $70 a barrel. However, the bank said on Friday that the move would be unsustainable based on the fundamentals of the oil market and investor positioning.

Barclays raised its price target for Brent crude to $60 a barrel in the fourth quarter and $55 a barrel in 2018, based on improved economic growth and unexpected disruptions due to conflict in Iraq and powerful storms in the United States.

Michael Cohen, head of energy markets research at Barclays, believes the consensus that OPEC will agree this month to extend production cuts past the expiration of the deal in March is premature. While bin Salman says Saudi Arabia is ready to extend the agreement, Russian President Vladimir Putin has suggested Moscow could wait to assess the market in March, he notes.

“The decision to extend OPEC/Non-OPEC cuts is not a decision for OPEC or Saudi Arabia alone,” Cohen wrote. “Neither the OPEC Secretariat nor Riyadh will commit to an extension without Russia’s participation, in our view.”