Published: Thu, May 17, 2018
Markets | By Otis Pena

Crude Oil Prices Defy Forecast, Hit $78.18

Crude Oil Prices Defy Forecast, Hit $78.18

After the US' decision to withdraw from the Iranian denuclearization deal, oil prices have elevated as traders wait to see how the Middle East will stabilize following the re-imposition of hefty U.S. sanctions on Iran trade.

"The only reason why we're not seeing higher prices from here today is the strength of the USA dollar", Tariq Zahir, managing member at Tyche Capital Advisors, told Reuters.

The Organization of the Petroleum Exporting Countries and other large oil producers led by Russian Federation, have agreed to cut their combined oil output by 1.8 million bpd to reduce bloated global oil inventories and support prices. Both the EIA and API reports have come in very different, prompting a largely rotational oil trade.

More figures on USA oil output will be released separately by the EIA and International Energy Agency on Wednesday. The global benchmark crude traded at a $7.75 premium to West Texas Intermediate for delivery the same month.

Oil poked its head above $80 on Thursday. In fact, the oil price rose along with demand until we saw a separation from that relationship as the mortgage crisis developed.

Asia's demand is at record highs and with rising prices its crude could cost $1 trillion this year, about twice what it paid during the market lull of 2015/2016.

At the same time, China's domestic crude oil production has been languishing near June 2011 lows in the first quarter this year, prompting higher imports to meet growing demand. A stronger dollar makes it more expensive to buy dollar-denominated commodities like oil.

Crude Oil Prices Defy Forecast, Hit $78.18

The IEA said global oil demand would average 99.2 million bpd in 2018, although USA bank Goldman Sachs said consumption would cross 100 million bpd "this summer". Crude oil inventories (-1.4m vs. -2.0m expected) were better than expectations.

Non-OPEC supply this year now is forecast to grow by 1.7 million b/d y/y, with 89% from the United States.

While it's "too soon to say what will happen this time", the agency said, Iran's fellow OPEC members could fill the gap because their pact to restrain supply leaves them with spare production capacity.

The International Energy Agency on Wednesday warned global demand is likely to moderate this year, as the price of crude nears $80/Bbl and many importing nations no longer offer consumers generous fuel subsidies.

Potential oil supply disruptions in Iran and Venezuela have prompted oil traders to focus on geopolitics rather than fundamentals, the International Energy Agency (IEA) said in its latest monthly report Wednesday, warning that any supply cuts could prompt prices to rocket. The call on OPEC crude and stockpiles will average around 32.25 million barrels a day for the remainder of 2018, about 600,000 higher than April output.

OPEC, for its part, estimated that the excess oil inventories in the OECD had shrunk to just 9 million barrels.

The U.S.' answer to high prices is to drill, baby, drill.

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