Tightening oil supplies in the global oil pool leading to higher crude out prices

While OPEC’s price cuts are slowly driving up crude oil prices upwards, analysts from BofA Merrill Lynch have forecast higher crude oil prices for the remainder of 2017 and early 2018 citing rising geopolitical tensions between the U.S. and Iran.

With political tensions rising between the United States and Iran, the oil market is starting to attract significant risk premium, as a result the global price benchmark for crude is shooting up northwards.

After months of range-bound trading, which OPEC tried to break by cutting supplies although that move largely had minimal impact given rising U.S. outputs, crude oil prices however have now started moving up due to stronger demand, especially from China.

Despite profit bookings on Tuesday, the international benchmark for oil prices – Brent crude futures LCOc1, was at $57.79 at 0148 GMT, 2.5% higher than last Friday’s settlement, placing it almost a third above mid-year levels.

U.S. West Texas Intermediate (WTI) crude futures Clc1, were also seen trading at $51.76 per barrel, although slightly down from their last settlement, but still nearly 2% higher than last Friday’s settlement, and almost a quarter above mid-June levels.

Crude oil prices started their northwards march following the capture of major Kirkuk, a major oil city in Iraq by Kurds. There has also been reports of Kurds shutting down almost 350,000 barrels per day (bpd) of production from Bai Hassan and Avana, major fields, citing security reasons.

“Kirkuk, the main city in the region, produces around 10 percent of Iraq’s total oil output and any (further) disruption could therefore have a significant impact on supply,” said William O‘Loughlin, investment analyst at Rivkin Securities.

As per the Eurasia Group, a political risk consultant, “Flows will remain vulnerable until an agreement is reached.”

Although the oil market has largely factored in the fighting in Iraq, it has however been spooked by rising tensions between the U.S. and Iran. Last Friday, U.S. President Donald Trump refused to certify Iran’s compliance over an international nuclear deal, which leaves the U.S. Congress 60 days to decide whether the U.S. will take action against Tehran.

In the previous round of sanctions against Iran, nearly 1 million bpd of oil was cut from the global oil pool.

If sanctions are again reimposed on Iran, it would add to supply cut measures taken by Organization of the Petroleum Exporting Countries (OPEC) and add to further tightening of supplies in the global oil market, said analysts who have are now revising upwards their crude oil price forecasts for the rest of the year and into 2018.

“We see Brent averaging $54 this quarter and $52.50 per barrel in 1H18, compared with our previous forecasts of $50 and $49.50 per barrel, respectively,” said Bank of America Merrill Lynch

“We also adjust WTI to average $49 this quarter, relative to our previous forecast of $47 per barrel.”

It went on to add, that its “revised global oil supply and demand forecasts point to a sizeable deficit in 2017 of 230 thousand bpd” and warned of further upside potential to its outlook.

“Upside risks to our projections include geopolitics and a much tighter-than-expected refining capacity environment.”

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