Oil rally takes Brent crude closer to 3-year high

Some Opec countries, whose economies have been battered in recent years, have welcomed a rise in prices

Brent crude has risen to its highest price level in almost three years as Opec-led production cuts take effect, global oil stockpiles fall and geopolitical tensions rise, overriding concerns about growing US shale output.

The international oil benchmark hit a high of $69.37 a barrel on Wednesday — the highest since May 2015 — with Brent creeping closer to levels last seen in 2014 when the price crash began. The marker eased slightly in afternoon trading to $69.04 a barrel.

“We are in an environment where Opec producers and Russia have reduced their supplies and stocks have seen drawdowns. At the same time, geopolitical issues are a concern,” said Oliver Jakob, at consultancy Petromatrix. He noted the potential reimposition of sanctions on Iran by the US that have until now been waived.

Some analysts, such as Carsten Fritsch at Commerzbank, said recent price rises did not fall in line with underlying fundamentals and risked “overshooting”. But others have said a weaker US dollar and stronger global economic growth figures, which could lead to greater than expected demand for oil, have also supported prices.

US government data on inventories published on Wednesday showed a larger than expected 4.9m barrels fall in crude stockpiles for the week ending January 5 to 419.5m barrels. Separate data from the American Petroleum Institute this week showed a larger drawdown of more than 11m barrels.

US crude marker West Texas Intermediate hit its 2014 high on Tuesday and rose a further 33 cents in Wednesday afternoon trading to $63.31 a barrel.

Some Opec countries, whose economies have been battered in recent years, have welcomed a rise in prices that has accelerated since the cartel and its allies agreed to extend a supply cuts agreement for the whole of 2018. Brent has risen nearly 10 per cent since late November.

Still, concerns are swirling about higher levels of US shale production, despite US shale companies saying they are focusing on profitability over volume. The US Energy Department’s statistical arm predicted crude output would grow at record rates this year and would exceed 11m barrels a day in 2019.

This would undermine efforts by global producers to curb output to reduce global stockpiles.

Bijan Zanganeh, Iran’s oil minister, said on Tuesday that some Opec members were not keen on increased prices, particularly more than $60 a barrel, that would provide support to a resurgent US shale sector, domestic news agency Shana said.

Opec oil cuts

But Mr Zanganeh said the rise in Brent in recent days reflected the impact of supply cuts and cold weather. “We are in winter, a season in which prices go up as demand for petroleum products goes up.”

Even as excess stockpiles are falling, the oil market is again sensitive to supply disruptions — such as in Venezuela — and geopolitical events in crude-producing countries.

The agreement between Iran and world powers on its nuclear capabilities, which saw an end to sanctions on oil exports, is in jeopardy while domestic tensions in Tehran and other major cities have also risen in recent days.

Meanwhile, Saudi Arabia’s rapid social and economic reforms, coupled with a more aggressive foreign policy, are among factors being monitored closely.

Yemen’s Houthi rebels have threatened to block a crucial shipping route where the Red Sea meets the Gulf of Aden if Saudi Arabia and its partners do not give up an attempt to move towards the port of Al-Hudaydah, analysts at London-based PVM said.

This post originally appeared on Financial Times

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