Oil prices hit a three-and-a-half-year high yesterday supported by tight supply as well as renewed USA sanctions against Iran that are likely to disrupt crude oil exports from one of the Middle East's major producers. Saudi Arabia suggested shortly after the US announced its withdrawal from the Iran nuclear deal that OPEC would act to mitigate any supply shortfall should it occur.
The "outlier", as has been the case for the past few years, is the USA tight oil industry, where investments rose by more than 42% y/y in 2017, to about $138 billion.
Not all indicators pointed to a tighter market, however.
Saudi Arabia seems to be the biggest beneficiary of Trump's action. With Saudi Arabia signaling that it wants prices in the $80-100 range, the kingdom's ambitious goals of its initial public offering and social spending are distorting OPEC's strategy.
USA crude inventories fell by 1.4 million barrels in the week to May 11, compared with analyst expectations for a 763,000 barrel decrease.
On the supply side, Iran's impact on the global oil market has yet to be quantified or seen. He decided in January to hold back from imposing tough economic sanctions against Tehran, but only to give more time for Europe to fix the awful flaws in the agreement.
Oil market supply deficit to average approximately 800,000 b/d in 2018.
The SP11 agreement was signed last July, making Total the first major Western energy company to invest in the Islamic Republic since sanctions were lifted in 2016. Analysts estimate anywhere from 200,000 to 1 million bpd could be cut from global exports next year.
However, since the rupee value against dollar is much depreciated since then, the impact on India's trade balance would be higher. Virtually all of them, from Europe to Asia, vehemently disagree with Trump's move.
While it later pulled back to $79.79, it was still 51 cents higher than yesterday. The country has been buying around 300,000 b/d so far this year. A CNBC commentator said hitting the 2008 all-time high of $147 is possible.
According to agency reports, USA crude inventories C-STK-T-EIA dropped by 1.4 million barrels in the week to May 11, to 432.34 million barrels. If OECD stocks are adjusted for the rise in consumption, current inventories are now below the five-year average.
Leading production increases is the USA, where crude output has soared by 27% in the last two years, to a record 10.72-million barrels a day, putting the U.S. within reach of top producer Russia's 11-million barrels a day. Production from Venezuela is already falling. This country is seeing a steep decline in its production for some time and its shipments to China are reflecting that situation.
China will suck up the most oil, followed by other Asian countries and OECD Americas. OPEC's latest monthly report says that 90 percent of supply growth outside the cartel this year will occur in the United States.
Iran's oil buyers continue to buy its crude, assessing the implications of the sanctions during the 180-day wind-down period. Brent has averaged about $69 a barrel this year thus far and almost touched $80 a barrel this week.
Market participants would also be taking cues from the rising rig count in the US.
There are several ways to play higher oils prices. Let's wait for the news.
While all eyes are riveted on Iran and the Middle East, the pace of Chinese oil demand growth could be the most underappreciated story in oil markets right now, Bloomberg Opinion columnist David Fickling writes. "Still, the fact is that crude oil prices have risen by almost 75% since June 2017", the agency cautioned.