Oil rises ahead of U.S. sanctions on Iran, but outlook for 2019 less certain

CNBC

  • U.S. sanctions on Iran are set to go into effect in November.
  • Financial markets have built up large long positions in anticipation of more increases in prices.

Oil prices rose on Friday as traders anticipated a tighter market due to U.S. sanctions against Iran’s crude exports, which are set to start next month.

International benchmark Brent crude oil futures were at $84.98 per barrel at 0504 GMT, up 40 cents, or 0.5 percent from their last close.

U.S. West Texas Intermediate (WTI) crude futures were up 47 cents, or 0.6 percent, at $74.80 a barrel.

The gains helped claw back some of the losses from the previous session due to rising U.S. inventories and after Saudi Arabia and Russia said they would raise output to at least partly make up for expected disruptions from Iran.

“Brent front-month prices are up 6 percent over the last week as it becomes increasingly apparent that Iranian exports could fall below 1 million barrels per day in November,” said U.S. bank Jefferies on Friday.

U.S. sanctions will start targeting Iran’s crude exports from November 4, and Washington is putting pressure on governments and companies globally to fall in line.

“It now appears that only China and Turkey may be willing to risk U.S. retaliation by transacting with Iran,” Jefferies said.

The investment bank said there was currently enough oil to meet demand, but warned that “global spare capacity is dwindling to the lowest level that we can document … meaning any further supply disruptions would be difficult for the market to manage – and could lead to spiking crude oil prices.”

An expectation of tighter markets is fueling bullish financial oil market sentiment.

Financial traders have accumulated bullish long positions betting on a further rise in prices amounting to almost 1.2 billion barrels of oil.

Meanwhile, the number of short positions in the six most important petroleum futures and options contracts has fallen to the lowest level since before 2013, creating a near-record imbalance between bullish and bearish positions in financial crude markets.

“Bullish bets have increased substantially as markets are moving ahead of an impending shortfall from U.S.-Iran sanctions,” said Benjamin Lu of Singapore-based futures brokerage Phillip Futures on Friday.

There are, however, voices of caution.

“While upside price risks will prevail for now, fundamental data outside of Iran has not turned bullish in our view,” Goldman Sachs said in a note to clients dated Oct. 4.

“We expect fundamentals to gradually become binding by early 2019 as new spare capacity comes online … pointing to the global market eventually returning into a modest surplus in early 2019,” the bank said.

And while Goldman said there was still a “robust demand outlook”, there are increasing signs that high oil prices and declining emerging market currencies like India’s rupee or Indonesia’s rupiah are hitting fuel consumption.

Oil falls as Saudi and Russia quietly agree to output rise, US stocks swell

CNBC

  • Saudi, Russia agreed output rise without telling OPEC, according to sources.
  • On Wednesday, data from the Energy Information Administration showed that U.S. crude inventories rose by nearly 8 million barrels in the previous week to around 404 million barrels.

Oil prices on Thursday fell from four-year highs reached the previous session, pressured by rising U.S. inventories and after sources said Russia and Saudi Arabia struck a private deal in September to raise crude output.

Brent crude oil futures were trading at $85.85 per barrel at 0104 GMT, down 44 cents, or 0.5 percent, from their last close.

Brent on Wednesday hit a four-year high of $86.74 a barrel.

U.S. West Texas Intermediate (WTI) crude futures were down 30 cents, or 0.4 percent, at $76.11 a barrel.

“Data for last week showed a much more significant than expected … build in U.S. commercial crude (inventories), which generally suggests that oil prices should tumble,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore.

U.S. crude oil stocks rose by nearly 8 million barrels last week to about 404 million barrels, the biggest increase since March 2017, Energy Information Administration data showed on Wednesday.

U.S. weekly Midwest refinery utilization rates dropped to 78.9 percent, their lowest since October 2015, according to the data.

Meanwhile, U.S. crude oil production remained at a record-high of 11.1 million barrels per day (bpd).

“This on top of the other big news of the day from Riyadh that … Saudi Arabia and Russia will boost output,” Innes said.

Russia and Saudi Arabia struck a private deal in September to raise oil output to cool rising prices, Reuters reported on Wednesday, before consulting with other producers, including the rest of the Organization of the Petroleum Exporting Countries (OPEC).

Russia’s and Saudi Arabia’s actions come as markets have heated up ahead of U.S. sanctions against Iran’s oil sector, which are set to kick in from Nov. 4, and which many analysts expect to knock around 1.5 million bpd of supply out of markets.

On the demand side, there is increasing concern that high oil prices and weakening emerging market currencies are creating a toxic inflationary mix that could erode fuel demand and economic growth.

“We have been taking a very close look at the demand signals in the market, and what we have been seeing is not good, JBC Energy said on Wednesday in a note to clients.

The energy consultancy said it had revised its oil demand forecast downwards amid Brent prices above $80 and diving currencies in many emerging markets, as well as burgeoning product stocks and the ongoing Sino-U.S. trade dispute.

“We are not talking about cosmetic changes either. We have cut our forecast for 2018 demand growth by a whopping 300,000 bpd to below 1.1 million bpd,” it said.

Oil near 4-yr high as producers resist output rise to offset Iran sanctions

CNBC

  • U.S. sanctions to target Iran’s oil exports from November.
  • OPEC, Russia so far resist calls to raise output.
  • High oil prices threaten emerging market growth.

Oil prices on Tuesday were within reach of four-year highs hit in the previous session, as looming U.S. sanctions against Iran and unwillingness by the Organization of the Petroleum Exporting Countries (OPEC) to raise output supported the market.

Brent crude futures were at $81.45 per barrel at 0421 GMT, up 25 cents, or 0.3 percent, and close to the intraday peak touched the previous day at $81.48, the highest level since November 2014.

U.S. West Texas Intermediate (WTI) crude futures were at $72.27 a barrel, up 19 cents, or 0.3 percent from their last settlement.

The United States from Nov. 4 will target Iran’s oil exports with sanctions, and Washington is putting pressure on governments and companies around the world to fall in line and cut purchases from Tehran.

“Iran will lose sizeable export volumes, and given OPEC+ reluctance to raise output, the market is ill-equipped to fill the supply gap,” Harry Tchilinguirian, global head of commodity markets strategy at French bank BNP Paribas, told the Reuters Global Oil Forum on Tuesday.

OPEC+ is the name given to the group of oil producers, including non-OPEC supplier Russia, that agreed to curtail output starting in 2017.

While Britain, China, France, Germany, Russia and Iran on Tuesday said they were determined to develop payment mechanisms to continue trading despite the sanctions by the United States, most analysts expect Washington’s actions to knock between 1 million and 1.5 million barrels per day (bpd) of crude oil supplies out of markets.

“We view Brent’s rally above $80 per barrel as fundamentally justified,” said Fitch Solutions in a note.

Will OPEC act?

U.S. President Donald Trump has demanded that OPEC and Russia increase their supplies to make up for the expected fall in Iranian exports. Iran is the third-largest producer in OPEC.

OPEC and Russia, however, have so far rebuffed such calls.

“Any formal decision on oil output by the producer group, barring an extraordinary meeting, will only take place at the December meeting. Thus the window period for oil prices to potentially extend gains is quite wide as Iran loses exports and OPEC+ remains on standby,” Tchilinguirian said.

Ashley Kelty, oil analyst at financial services firm Cantor Fitzgerald said crude could soon hit $90 per barrel.

“We don’t believe OPEC can actually raise output significantly in the near term, as the physical spare capacity in the system is not that high,” Kelty said.

Bank of America Merrill Lynch has lifted its average Brent price forecast for 2019 from $75 per barrel to $80, while it increased its WTI crude oil forecast by $2 to $71 per barrel.

The bank said “the Iran factor may dominate the market near-term and cause a (crude price) spike,” although it added that emerging market “demand concerns could reappear thereafter.”

Indian refiners – struggling from high crude feedstock prices and a sliding rupee – are planning to reduce oil imports in what could be a first sign that high prices are starting to hurt demand.

Despite the bullish sentiment, some traders said current prices already reflected the tighter market, and that more oil would be coming in 2019.

Commodity trading giant Vitol said on Tuesday that non-OPEC producers, especially the United States, may insert up to 2 million bpd of new crude into the market in 2019.

To reflect rising U.S. oil exports, CME Group Inc said on Monday it will launch a WTI Houston crude futures contract in the fourth quarter.

CME’s announcement comes after rival Intercontinental Exchangesaid in July it would offer a Houston crude futures contract.

Oil prices claw back some ground, but demand worries drag

CNBC

  • Oil prices saw a partial recovery on Friday.
  • Worries over emerging markets and the U.S.-China trade dispute continue to weigh on sentiment over future growth in oil demand.

Oil on Friday clawed back some of its losses from the previous session, when prices fell the most in a month, as concerns about oil supply are countering worries that emerging market crises and trade disputes could dent demand.

Brent crude was up 8 cents, or 0.1 percent, at $78.26 a barrel by 0338 GMT, after falling 2 percent on Thursday. The global benchmark rose on Wednesday to its highest since May 22 at $80.13.

U.S. West Texas Intermediate (WTI) futures were up 18 cents, or 0.2 percent, at 68.76 a barrel, after dropping 2.5 percent on Thursday.

Brent is heading for a 1.8 percent gain this week, while WTI is on track for a 1.5 percent increase.

“Prices remain well supported as the market continues to fret about ongoing structural supply issues elsewhere,” ANZ Research said in a note.

The International Energy Agency on Thursday warned that although the oil market was tightening at the moment and world oil demand would reach 100 million barrels per day (bpd) in the next three months, global economic risks were mounting.

“As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the U.S. dollar, raising the cost of imported energy,” the agency said.

“In addition, there is a risk to growth from an escalation of trade disputes,” the Paris-based agency said.

China will not buckle to U.S. demands in any trade negotiations, the major state-run China Daily newspaper said in an editorial on Friday, after Chinese officials welcomed an invitation from Washington for a new round of talks.

U.S. President Trump said on Twitter on Thursday that the United States holds the upper hand in talks.

“We are under no pressure to make a deal with China, they are under pressure to make a deal with us,” Trump tweeted.

Still, supply concerns are supported by data showing that U.S. crude production fell by 100,000 bpd to 10.9 million barrels per day last week as the industry faces pipeline capacity constraints.

Though weekly output slipped, the United States likely surpassed Russia and Saudi Arabia earlier this year to become the world’s largest crude oil producer, based on preliminary estimates from the Energy Information Administration.

Although the EIA does not publish crude production forecasts for Russia and Saudi Arabia in its short term outlook, it expects that U.S. output will continue to exceed Russian and Saudi production for the remaining months of 2018 and through 2019.

The loss of Iranian oil to the market as refiners are cutting or halting purchase ahead of U.S. sanctions in November is also raising concerns about supply.

Oil firm as Iran sanctions loom, but US seeks to prevent supply shortfall

CNBC

  • U.S. sanctions to target Iran oil exports from November.
  • Washington wants other producers replace falling Iran exports.
  • Asian refiners buy American oil to make up for Iranian supply.

Oil was steady on Tuesday, supported by looming U.S. sanctions against Iran’s petroleum industry.

But prices were capped by signs that increased supplies by other major producers, including the United States and Saudi Arabia, could make up for the disruptions from Iran.

U.S. West Texas Intermediate (WTI) crude futures were at $67.61 per barrel at 0112 GMT, up 7 cents from their last settlement.

Brent crude futures climbed 11 cents to $77.48 a barrel.

“It was a mixed performance in the crude oil market,” said ANZ bank in a note, pointing to Washington’s sanctions against Iran’s oil exports that will be enforced from November.

Washington is putting pressure on other countries to also cut Iran imports, with close allies like South Korea and Japan, but also India, showing signs of falling in line.

ANZ bank said prices were capped “amid speculation later in the day that Saudi Arabia and Russia will fill any gap.”

U.S. Energy Secretary Rick Perry met with Saudi Energy Minister Khalid al-Falih on Monday in Washington, the U.S. Energy Department said, as the Trump administration encourages big oil-producing countries to keep output high ahead of the renewed sanctions.

Perry will also meet with Russian Energy Minister Alexander Novak on Thursday in Moscow.

Russia, the United States and Saudi Arabia are the world’s three biggest oil producers by far, meeting around a third of the world’s almost 100 million barrels per day (bpd) of daily crude consumption.

Combined output by these three producers has risen by 3.8 million bpd since Sept. 2014, more than the peak 3 million bpd Iran has managed during the last three years.

Big U.S. discount

With Middle East crude markets tightening because of the U.S. sanctions against Iran, many Asian refiners are seeking alternative supplies, with South Korean imports of U.S. crude likely hitting a record in November.

At the same time, American oil producers are seeking new buyers for crude they used to sell to China before orders virtually dried up because of the trade disputes between Washington and Beijing.

Traders said this pulled wide open the discount of U.S. WTI crude versus Brent to almost $10 per barrel, the biggest since June.