Oil rises to within four-year high as producers resist output increase to offset Iran sanctions
Looming U.S. sanctions against Iran and the unwillingness or inability of the Organization of the Petroleum Exporting Countries (OPEC) and top oil producer Russia to raise output to offset the loss of Iranian supply have spurred prices higher.
Brent crude futures LCOc1 were at $81.42 per barrel at 0315 GMT, up 22 cents, or 0.3 percent, and close to the intraday peak reached the previous day of $81.48, the highest since November 2014.
U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $72.26 a barrel, up 28 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 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 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.
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 in 2019.
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.
And despite the tight market outlook for the coming months, some traders said more oil would be hitting markets in 2019, inform Reuters.
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.