Oil rises 1% ahead of expected shortfall in Iranian supply

London — Oil prices rose by nearly 1% on Thursday, driven by the prospect of a shortfall in global supply once US sanctions against major crude exporter Iran come into force in just five weeks’ time.

This week, US President Donald Trump demanded that oil cartel Opec raise production to prevent further price rises ahead of key congressional elections in early November.

Analysts say Opec and partner Russia appear unlikely, at this point, to respond immediately to Trump’s demands, while US energy secretary Rick Perry has also ruled out using US strategic crude reserves as a means of lowering the price.

The most-active December Brent crude futures contract was up 59c at $81.38 a barrel at 9.21am GMT, just off Tuesday’s four-year high of $82.55. The front-month November contract expires on Friday. US futures were up 36c at $71.93 a barrel.

“On paper, you could argue that the technical and fundamental perspective points to higher prices, so I think this will carry on into next week and further out,” Saxo Bank senior manager Ole Hansen said. “$100 dollars barrel, I am struggling to see that. Already at $80, we are seeing emerging-market local oil prices pretty close to where we peaked a few years ago … the race to protect consumers from further price rises from here could potentially impact demand growth sooner than would otherwise have been expected.”

Estimates of how much Iranian crude could disappear from the market once US sanctions come into force on November 4 vary widely among the analyst community, from anywhere from 500,000 barrels per day (bpd) all the way to 2-million bpd. At its 2018 peak in May, Iran exported 2.71-million bpd of crude oil, equivalent to nearly 3% of daily global consumption.

“We view crude-market risks as heavily skewed to the upside and while we are not explicitly forecasting Brent to rise to $100 a barrel, we see material risks of this coming to fruition,” Japanese bank Mitsubishi UFJ Financial Group said in a note to clients.

Meanwhile, Saudi Arabia will quietly add extra oil to the market over the next couple of months to offset a drop in Iranian production, but is worried it might need to limit output next year to balance global supply and demand as the US pumps more crude.

Opec has little spare capacity to make up for any drop in exports from Iran, which is the group’s third-largest producer.

US crude production hit a record 11.1-million bpd in the week ending September 21, according to data from the Energy Information Administration (EIA) on Wednesday. This is an increase of almost a third since mid-2016.

Commercial crude stocks rose by 1.85-million barrels, to 395.99-million, according to the EIA data.

Reuters