Oil prices rise amid risk of supply disruptions

CNBC

  • Oil prices rose on Tuesday amid worries there could be a high risk of disruptions to supply.
  • Traders said those risks included potentially spreading conflict in the Middle East and renewed U.S. sanctions against Iran.

Oil fracking California

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Oil prices rose on Tuesday amid worries there could be a high risk of disruptions to supply, especially in the Middle East.

Brent crude oil futures were at $71.69 per barrel at 0326 GMT, up 27 cents, or 0.4 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were up 32 cents, or 0.5 percent, at $66.54 a barrel.

Traders said oil markets were receiving general support due to a sense that there were high risks of supply disruptions, including a potentially spreading conflict in the Middle East, renewed U.S. sanctions against Iran and falling output as a result of political and economic crisis in Venezuela.

“With so many potential supply disruptors in play and few signs that the current market upheaval will end any time soon, traders continue to pay the geopolitical risk premium,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage OANDA in Singapore.

“Oil prices should remain bid … at least through the Iran nuclear deal deadline (May 12) if not for the remainder of 2018,” he added.

Oil markets have generally been well supported this year, with Brent up by around 16 percent from its 2018-low in February, due to healthy demand which comes as the producer cartel of the Organization of the Petroleum Exporting Countries (OPEC) leads supply cuts aimed at tightening the market and propping up prices.

US output soars

Beyond OPEC’s production restraint and concerns about supply disruptions, the main market driver in oil has been the United States, where crude production has soared by almost a quarter since mid-2016 to 10.53 million barrels per day (bpd), largely thanks to a booming shale industry.

Only Russia pumps out more oil currently at almost 11 million bpd.

“U.S. shale producers have been quietly capitalizing on higher oil prices with increasing rig counts seen. A staggering amount of 73 rotary rigs have been placed since January 2018,” said Benjamin Lu of Phillip Futures in a note on Tuesday.

“As such, we expect a softening in crude oil prices as markets adjust from a bullish streak,” he added.

The American Petroleum Institute (API) is due to publish weekly U.S. fuel inventory data later on Tuesday while official government data, including on production, is due from the U.S. Energy Information Administration (EIA) on Wednesday.

Brent Crude Futures Still High

Risk premium returns to oil over Iraq fighting, rising US-Iran tensions

  • Iraqi forces captured Kurdish-held Kirkuk, a major oil city
  • Global price benchmarks rose as investors worried over supplies
  • Traders also kept an eye on tensions between the U.S. and Iran

Iraqi forces drive past an oil production plant as they head towards the city of Kirkuk on October 16, 2017.

Ahmad Al-Rubaye | AFP | Getty Images
Iraqi forces drive past an oil production plant as they head towards the city of Kirkuk on October 16, 2017.

A risk premium has returned to oil markets, boosting global prices as escalating fighting in Iraq threatens supplies while political tensions loom between the United States and Iran.

After months of range-bound trading during which OPEC-led supply cuts supported crude prices but rising U.S. output capped markets, prices have moved up significantly this month just as demand looks stronger than at any point in recent months, especially in China.

Despite some profit taking earlier on Tuesday, Brent crude futures were still at $57.82 at 0511 GMT, 2.5 percent higher than last Friday’s settlement – and almost a third above mid-year levels.

U.S. West Texas Intermediate (WTI) crude futures were at $51.78 per barrel, down slightly from their last settlement, but still some 2 percent higher than last Friday, and almost a quarter above mid-June levels.

The higher prices came as Iraqi government forces captured the major Kurdish-held oil city of Kirkuk on Monday, responding to a Kurdish independence referendum. There were also reports that Kurds had shut down some 350,000 barrels per day (bpd) of production from major fields Bai Hassan and Avana due to security concerns.

“In the case of Kurdistan, the 500,000 bpd Kirkuk oil field cluster is at risk with initial reports that 350,000 bpd has shut in, although this remains unclear,” Goldman Sachs said on Tuesday.

The escalating fighting in Iraq has spooked markets as it adds to rising tensions between the United States and Iran. Last Friday U.S. President Donald Trump refused to certify Iran’s compliance over a nuclear deal, leaving Congress 60 days to decide further action against Tehran.

Iraqi and Kurdish governments both have stakes in keeping the oil flowing  

During the previous round of sanctions against Iran, some 1 million bpd of oil was cut from global markets.

“If they are (new sanctions), we expect that several hundred thousand barrels of Iranian exports would be immediately at risk,” Goldman said.

“These issues (Iraq and Iran) remind us oil and geopolitics are very much inter-linked and it will remain so…oil security remains a critical issue for all the countries,” Fatih Birol, the executive director of the International Energy Agency (IEA) told Reuters on Tuesday.

With ongoing supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC) further tightening the market, analysts were revising upward their crude price forecasts for the rest of the year and into 2018.

Birol said that the rate of compliance by OPEC and its partners in their targeted cutting of around 1.8 million bpd between January this year and March 2018 was about 86 percent.

Because of a tightening market and rising risk, Bank of America MerrillLynch said it was raising its oil price forecasts.

“We see Brent averaging $54 this quarter and $52.50 per barrel in 1H18, compared with our previous forecasts of $50 and $49.50 per barrel, respectively.

We also adjust WTI to average $49 this quarter, relative to our previousforecast of $47 per barrel.”

The U.S. bank said it expected a sizeable deficit in 2017 of 230 thousand bpd, and that there was further upside potential to its outlook.

President Donald Trump’s announcement of a new Iran strategy won’t necessarily have an immediate impact on the oil market

Deterioration of Iran deal could have ‘meaningful impact’ on oil market next year: Analyst

  • President Donald Trump’s announcement of a new Iran strategy won’t necessarily have an immediate impact on the oil market, but that could change, experts warned on Friday.
  • Sometime mid-2018, you could see the Iran deal start to deteriorate and then you could have meaningful impact on oil supplies right when the market is tightening, FBR’s Benjamin Salisbury said.
  • Andy Lipow, president of Lipow Oil Associates, believes Trump’s announcement introduces “a degree of geopolitical risk and uncertainty going forward that could increase oil prices.”

FBR's Benjamin Salisbury: Iran deal deterioration could have meaningful oil impact in the middle of next year

FBR’s Benjamin Salisbury: Iran deal deterioration could have meaningful oil impact in the middle of next year  

President Donald Trump’s announcement of a new Iran strategy won’t necessarily have an immediate impact on the oil market, but that could change, experts warned on Friday.

The president said on Friday he would not certify the multinational nuclear agreement with Iran. He also pledged to terminate the deal if Congress and U.S. allies do not reach a solution under a plan his administration has put forward.

Benjamin Salisbury, energy policy analyst at FBR Capital Markets, said oil investors need to be aware of potential risks down the road and not get complacent.

While there has been essentially no risk premium in the market because of excess supply, geopolitical risk will have to start being priced back in as supply and demand start to balance out in the oil market next year, he said in an interview with “Closing Bell.”

“The president has made it very clear that he wants to escalate the pressure on Iran. So sometime middle of next year you could see the deal start to deteriorate and then you could have meaningful impact on oil supplies right when the market is tightening,” Salisbury said in an interview with “Closing Bell.”

Andy Lipow, president of Lipow Oil Associates, believes Trump’s announcement introduces “a degree of geopolitical risk and uncertainty going forward that could increase oil prices.”

The 2015 deal allowed Iran to resume exporting oil. The country is currently exporting about 2.3 million barrels a day, but if there were renewed sanctions it could cut off that supply.

“The world simply can’t afford to see that lost supply because we can’t make it up from the other OPEC and non-OPEC producers,” he told “Closing Bell.”

And while there has been an oil glut, it has been getting “smaller and smaller,” Lipow pointed out.

“The last place that we have an excess supply of oil is actually in the U.S. and you saw week ago we exported record amounts of that oil and that trend’s going to continue for the rest of this year,” he said.

—CNBC’s Tom DiChristopher and Reuters contributed to this report.