Brent oil prices topped $83/barrel during trading on Friday as the market “came to grips with the fact that the Iranian sanctions are not that far away,” Phil Flynn of Price Futures Group told Reuters. Total photo.

Global inventories falling as supply tightens, boosting oil prices

Brent oil prices topped $83/barrel and hit a four-year high on Friday as the market grew more concerned that the Trump administration’s sanctions on Iranian crude exports will tighten the world’s crude supply.

By 12:56 p.m., EDT, benchmark Brent crude slipped from earlier highs in the session but was still up $1.70 to $83.08/barrel.  US West Texas Intermediate climbed $1.42 to $73.54/barrel and the Canadian Crude Index rose $1.26 to $39.81.

So far in the third quarter, Brent has gained over 4 per cent.

On Nov.4, the United States will reimpose sanctions on Iranian crude exports.  Iran is the third largest producer in OPEC and the Trump administration would like to see Tehran’s oil exports cut to zero.

In May, at its 2018 peak, Iran exported 2.71 million barrels per day (b/d) of crude, about 3 per cent of the world’s daily consumption.

“The market is coming to grips with the fact that the Iranian sanctions are not that far away,” Phil Flynn, an analyst at Price Futures Group told Reuters. “It’s going to tighten the market.”

The US government is hoping to force Tehran to negotiate a new nuclear agreement after President Donald Trump abandoned the 2015 Iran nuclear agreement.  The pact was signed by former President Barack Obama and representatives from the United Kingdom, Russia, France, and China, Germany and the European Union.

Chinese oil major Sinopec says it has cut its shipments of Iranian crude this month by half.  Reuters’ sources say the move is a result of pressure from the United States.

But another top buyer of Iranian crude, India, says it remains committed to buying oil from Iran, according to the Iranian foreign minister.

Some OPEC countries have boosted their production recently, but analysts say that despite their efforts, global crude stocks have continued to fall as supply tightens.

This week, Saudi Arabia said it will increase its production in the coming months to offset the decline in Iranian production.  The kingdom says it has discussed with other OPEC and non-OPEC producers increasing their total production by about 500,000 b/d.

But Reuters reports that ANZ said in a note that, with estimated losses of 1.5 million b/d due to the Trump sanctions, major suppliers were unlikely to compensate for the stranded Iranian crude.

Saudi Arabia says OPEC is not only concerned with the coming months and the Iranian sanctions, but it is also looking to 2019.  One Reuters source familiar with OPEC policy said the cartel is concerned that rising US production coupled with a stronger US dollar and weaker emerging market economies could cut global demand for oil.

The US Energy Information Administration said US crude production hit a record high 11.1 million b/d last week.

However, pipeline constraints in the Permian Basin have stalled new drilling in the area.  The United States’ largest oil field is expected to produce 3.5 million b/d next month, just shy of Iran’s production.

Baker Hughes’ weekly drilling report shows the US oil rig count fell by three last week and now sits at 863.  In Canada, the rig count fell by 13 to 122.