Oil prices rose on Tuesday, but receded slightly during the day.  Middle East tensions and the possibility of a further drop in Venezuelan crude production underpinned prices.  Anadarko photo by Mike Goldwater. 

Oil prices rise to three-week highs early in session

Early in trading on Tuesday, oil prices rose to their highest levels in three weeks due to tensions in the Middle East and concerns over falling crude production in Venezuela.  Prices receded slightly as the session continued.

By 2:14 p.m. EDT, Brent crude futures $1.22 to $67.04/barrel and US WTI rose 2.16 per cent, or $1.34/barrel to $63.46/barrel.  The Canadian Crude Index rose by 2.44 per cent to $41.18/barrel.

Earlier in the session, Brent hit $67.80/barrel, the highest its been since late February.

Oil prices and tensions in the Middle East rose Tuesday.

“Geopolitics has come to the fore in today’s trading session, not least because the Saudi crown prince is on an official visit to the U.S. where the issue of Iran is expected to be on the agenda,” Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics told Reuters.

On Monday, Saudi Arabia called the 2015 nuclear deal signed by Iran and six world powers a “flawed agreement”.  These comments came one day before Crown Prince Mohammed bin Salman is to meet with US President Donald Trump.

In the past, Trump has threatened to withdraw the US from the Iran deal.  Should the deal be scrapped, new sanctions could be imposed on Iran which would significantly hurt the country’s recovering oil industry.

As well, there are concerns that Venezuela could see further declines in its crude production due to an economic and political crisis.  Since 2005, oil output in the South American country has fallen by half and now sits below 2 million barrels per day (b/d).  Unrest in the Venezuelan oil industry also boosted oil prices on Tuesday.

Last week, the International Energy Agency said Venezuela was “vulnerable to an accelerated decline”.  This drop could trigger a renewed drawdown of global crude stocks.

But, production increases in the United States, Canada and Brazil have stunted oil price gains and undermined OPEC’s efforts to reduce the global glut of crude.

Market analysts Drillinginfo says the market internals continue to “lack directional bias” and last week had some of the lightest daily trade volumes in recent history, and volume is the fuel for rallies or declines.

“Speculative length has been selling the rallies rather than adding to positions as they did earlier in the year. Expect outbreaks of positive runs, but recent history has shown that these runs will be met with selling (hedging) by US producers,” the firm said in its latest market outlook.

“Indications have the supply side overwhelming demand during the immediate period and should allow for a near-term test of support in the recent range ($58-$64/b).

Drillinginfo believes that the fundamentals mean prices will settle in a range around $55/b when supply and demand become the focus of the market once again.

Another issue facing OPEC is the widening gap between Brent and US WTI, which has made WTI crude more attractive to buyers.  Brent is the benchmark for a number of Middle East and other global crudes.

On Tuesday, the discount between Brent and WTI rose over $4/barrel.

Later on Tuesday, the American Petroleum Institute will release its data on US crude stocks and on Wednesday, the US Energy Information Administration will offer its data.

Reuters reports analysts expect US crude inventories to rise for the fourth straight week.