Oil prices rise, on fall in US rig count and looming sanctions against Iran

Singapore — Oil prices rose on Monday as US drilling for new production stalled and as the market eyed tighter conditions once Washington’s sanctions against Iran’s crude exports kick in from November.

US West Texas Intermediate (WTI) crude futures were at $68.19 a barrel at 3.44am GMT, up 44c or 0.65% from their last settlement.

Brent crude futures climbed 50c or 0.65% to $77.33 a barrel.

US energy companies cut two oil rigs last week, bringing the total count to 860, energy services firm Baker Hughes said on Friday.

The US rig count has stagnated since May, after staging a recovery since 2016, which followed a steep slump the previous year amid plummeting crude prices.

Outside the US, new US sanctions against Iran’s crude exports from November were helping push up prices.

Energy consultancy FGE said several major customers of Iran — including India, Japan and South Korea — were already cutting back on Iranian crude.

“Governments can talk tough. They can say they are going to stand up to Trump and/or push for waivers. But generally the companies we speak to … say they won’t risk it,” FGE said.

“US financial penalties and the loss of shipping insurance scares everyone,” it said in a note to clients.

Tighter outlook?

With US rig activity stalling and sanctions against Iran looming, the oil market outlook is tightening.

“Investors have largely turned positive again … likely welcoming the return of backwardation,” said Edward Bell, commodity analyst at Emirates NBD bank.

Backwardation describes a market in which prices for immediate delivery are higher than those for later dispatch.

It is considered a sign of tight conditions, giving traders an incentive to sell oil immediately instead of storing it.

The Brent backwardation between October this year and mid-2019 is currently about $2.20 a barrel.

While Washington exerts pressure on other countries to fall into line by cutting imports from Iran, it is also urging other major producers to raise their output in order not to create too strong a price spike.

US energy secretary Rick Perry will meet counterparts from Saudi Arabia on Monday, and from Russia on Thursday, as the Trump administration seeks to persuade the world’s biggest exporter (Saudi Arabia) and biggest producer (Russia) to keep output up.

One key question is how demand will develop given the trade dispute between the US and China, and general weakness in emerging markets.

Asian shares started the week in the red on Monday, faltering for the eighth straight day as US President Donald Trump threatened yet more import tariffs on Chinese goods.

Consultancy FGE warned that “trade wars, and especially rising interest rates, can spell trouble for the emerging markets that drive (oil) demand growth”.

Despite this, FGE said the likelihood of significantly weaker oil prices was relatively low as the Organisation of the Petroleum Exporting Countries (Opec) would withhold output to prevent prices from plunging.

“We see $65 a barrel as a trigger for cuts,” FGE said.

Reuters