Oil holds gains as markets tighten amid OPEC cuts, Iran sanctions

Mae Love
May 15, 2018

Global oil demand is rising sharply.

Despite this, OPEC´s latest report said producers were cutting more than required under the deal, while producers not party to the agreement, such as USA shale companies, were starting to face constraints on future output.

The surge in oil prices comes at a time of tight supply amid record Asian demand and voluntary output restraint by the Organisation of the Petroleum Exporting Countries and non-OPEC producers, including Russian Federation.

The OPEC report said oil inventories in OECD industrialised nations in March fell to 9 million barrels above the five-year average, down from 340 million barrels above the average in January 2017.

The increase was mainly the result of higher crude production in Saudi Arabia - the world's largest crude exporter and the de facto head of OPEC - and Algeria, the report said. The deal between OPEC, Russia and other non-OPEC producers has helped oil prices rise 40 percent since it took effect.

"That said, there are problems with transporting the oil at present, as the high $12 per barrel discount on WTI Midland as compared with WTI Cushing illustrates".

Oil and gas analyst for Hydrocarbon Capital Malcolm Graham-Wood predicts that about 1m barrels of oil will go off the market following the decision, reducing the supply of oil which was tight from before.

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But oil ministers have since said other metrics should be considered such as oil industry investment, suggesting they are in no hurry to end supply cuts.

In its Monthly Oil Market Report (MOMR) released Monday, the cartel raised its forecast for global oil demand as it now expects the world to consume 98.85 million barrels per day, up 1.65 million barrels a day from previous year.

The 14-member OPEC pointed to strong growth in developed and emerging economies in the first quarter.

OPEC slightly raised its estimate of growth in world demand this year to 1.65 million bpd. Market observers and analysts argue that US energy stocks are in a position to outperform broader equity markets this year, even if oil prices don't move higher.

Crude oil prices have increased more than 10% over the past month after President Donald Trump signaled it is likely the US will withdraw from a 2015 global agreement with Iran that eased sanctions in return for curbs to the country's nuclear program, the Wall Street Journal reports.

Before the Iran nuclear deal, the United States sanctioned Iran's oil production in 2012 which reduced the output from 2.5m barrels per day to just over 1m.

"The driving force behind the anticipated increase in global oil demand is likely based on expectations over stronger global economic growth", Lukman Otunuga, research analyst at FXTM, said. Saudi Arabia said last week it was ready to offset any shortage but would not act alone.

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