Brent crude has surpassed the $80 a barrel mark, close to this year’s highs, with traders weighing impending sanctions on Iran’s energy sector, lower forecasts for shale production and a big hurricane approaching the US east coast.
“Those of a bullish disposition currently have no shortage of ammunition. Yet they have been given a further helping hand by Mother Nature,” said Stephen Brennock at London-based broker PVM.
Brent, the international benchmark, rose 99 cents to $80.07 a barrel on Wednesday — the highest since the intraday peak of $80.50 a barrel in May. US marker West Texas Intermediate increased $1.67 a barrel to $70.96.
1. Iran’s oil exports in focus
Crude supplies from Iran are expected to take a hit as US sanctions come into effect in November, tightening the global oil market in spite of calls from US president Donald Trump to international producers to increase output.
“Iran is increasingly becoming the preoccupation of the crude market,” said analysts at JBC Energy. An expected squeeze on crude flows was already taking shape, they said, with Iran storing crude onshore as well as on vessels.
Alexander Novak, Russia’s energy minister, on Wednesday warned that the sanctions would create “huge uncertainty” for the market, with it still unclear how many big consumers would curb their purchases to meet US demands.
South Korea has already dropped imports to zero. Buyers in India and China, meanwhile, have begun to reduce their purchases even as both countries have said they will not submit to orders by the Trump administration.
Although Opec kingpin Saudi Arabia and its partner outside of the cartel, Russia, have said they will lead increases in production to offset any losses from Iran, whose domestic production has been falling, the ramp-up has been slower than anticipated.
Mr Trump has been keen to keep crude prices in check ahead of the midterm elections, fearful of any impact on domestic fuel prices. The US has also offered 11m barrels of oil held in strategic reserves for sale on to the market.
2. US shale production growth to slow
Crude oil production in the US is expected to grow at a slower than anticipated rate in 2019, which comes at a time that questions are mounting about available global supplies.
US crude output growth is forecast to moderate to 840,000 barrels a day, the US energy department said, down from a previous estimate of more than 1m b/d. Drilling in the Permian basin is slowing amid pipeline capacity constraints.
Bullish sentiment was also fuelled by data from the American Petroleum Institute this week that showed a 8.6m barrel drawdown in US crude stockpiles versus forecasts for an 805,000 barrel decline.
The US energy department on Wednesday also reported a much larger than expected draw in crude stockpiles. Inventories fell by 5.3m barrels compared to a forecast for a fall of 805,000 b/d.
Hurricane Florence threatens US east coast
3. Hurricane Florence nears US coast
Further propelling prices, is a big hurricane that is strengthening and approaching the coast of North Carolina or South Carolina, with more than 1.5m people ordered to evacuate their homes.
Amid storm surge warnings, east coast petrol prices are expected to rise temporarily as motorists fill up their tanks in anticipation of the hurricane. But analysts say demand, in fact, could drop if fewer people are driving their cars.
Anxieties that Florence could impact the Colonial Pipeline, which runs through the Carolinas and sends crude products to the north-east, have been dismissed, with analysts saying that it is deep underground and so will probably remain unaffected.
But they are still keeping an eye on the impact of any flooding or power outages at pumping stations for the pipeline.
Other smaller weather events, including Tropical Storm Isaac, are also being monitored as they may have a bigger impact on the oil and gas sector if they move towards the Gulf of Mexico — a hub for energy production and refining operations.
4. Hedge funds bet on rising prices
After months of liquidating long positions, hedge funds are now making further bets on rising oil prices amid concerns the sanctions against Iran could leave the market short of crude.
Net-long positions on Brent crude — the difference between bets on higher and lower prices — rose more than 7 per cent in the week ending September 4 to 416,742 futures and options contracts, according to data from ICE Futures Europe.
Net-long positions on West Texas Intermediate, the US marker, increased by 16,634 over the same period to 386,487 contracts, according to the US Commodity Futures Trading Commission.
5. Demand growth uncertainty ahead
One reason why Opec producers are not rapidly boosting output reflects uncertainty about the outlook for oil consumption given a challenging backdrop for the global economy.
Both the US energy department and Opec’s research arm have trimmed their forecasts for demand growth next year. The Energy Information Administration reduced its 2019 growth forecast by 100,000 barrels a day to 1.47m b/d, while Opec cut its estimates for a second consecutive month by 20,000 b/d to 1.4m b/d.
“Rising challenges in some emerging and developing economies are skewing the current global economic growth risk forecast to the downside,” Opec said in its monthly oil market report on Wednesday.
It added: “Rising trade tensions, and the consequences of further potential monetary tightening . . . in combination with rising global debt levels, are additional concerns.”
