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Crude weaker, but still near highs

By David Morrison  |  25/04/2018 15:32

Oil has pulled back from multi-year highs as Trump mulls tearing up Iranian deal and as US inventories jump

Crude near highs

Over the past seven days WTI and Brent hit their highest levels since early December 2014. WTI came within 50 cents of $70 per barrel while yesterday Brent traded less than 30 cents below $75. Both contracts have since sold off a touch in a move which has seen traders reduce their long-side exposure.

Iranian deal in jeopardy

Oil fell yesterday following comments from French President Emmanuel Macron who is currently in Washington and holding meetings with President Trump. During a press conference Mr Macron proposed changes to the current Iranian nuclear deal in an effort to persuade President Trump not to pull out all together. Mr Trump wants to tear up the deal made by his predecessor, Barak Obama. This led to the removal of sanctions in return for Iran promising to halt any ambitions it may have to develop nuclear weapons. Trump has called the deal “insane” and will decide on 12th May on whether to pull out of it and restore sanctions. As Iranian oil exports have risen by one million barrels per day (bpd) since sanctions were lifted, the reinstatement of trade restrictions could see much of this removed from the global market – if, that is, China and other Iran-friendly nations didn’t move in to buy this spare production.

US inventories jump

Crude came under further pressure following the release last night of the latest report from the American Petroleum Exchange (API) showing an unexpected build in crude oil inventories. This build in stockpiles was confirmed on Wednesday afternoon by data from the US Energy Information administration (EIA). This showed a 2.2 million barrel-build in crude inventories last week against an expected drawdown of 1.6 million. Once again, oil fell back on the news.

OPEC/non-OPEC production cut

But oil continues in an uptrend which began last summer. The OPEC/non-OPEC agreement to cut output by 1.8 million barrels per day (bpd) has played a major part in this. The deal came into force at the beginning of 2017 and there was initial scepticism that all parties would play fair by sticking to production cuts. However, compliance has been better than expected and this has helped to reduce global stockpiles back towards the 5-year average. This is despite a ramp-up in output from US shale producers which has taken US production up to a fresh record above 10.5 million barrels per day. The OPEC/non-OPEC output cuts have been extended in duration and are now set to run until the end of this year. Saudi Arabia has made it clear that it would like to see WTI settle in above $80 – a price which would boost the chances of a solid IPO for state oil giant Aramco. In addition, it now seems that Russia (the world’s largest producer) is also open to a further extension.

Oil drives inflation fears

However, the pick-up in oil prices is raising inflation fears and has been one of the drivers behind this week’s sharp rally in bond yields. On top of this, last Friday President Trump tweeted that OPEC was pushing oil prices to “artificially” high levels. Of course, much of the recent increase has come on the back of concerns that Trump will reimpose sanctions on Iran and on US tariffs on Russia. But it looks as if Trump is looking to put pressure on Saudi Arabia and other Gulf producers to wind back the current production cut agreement. This brings an extra element to the next OPEC meeting on 22nd June.
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