Oil Prices Hit Highest Level Since 2014

Oil prices have been on a tear over the past 12 months, rising more than 65 per cent from its US$42.50 per barrel low in June 2017 to recently breaching the US$70 per barrel level to start the week. We have heard this before, but it comes at a critical time as the showdown with the USA, and the high likelihood that there will be new sanctions on Iran, means that the global oil market will be caught short.

Iran has for months been preparing for the possibility that Trump will pull out of the nuclear agreement, Iranian President Hassan Rouhani said, adding that the U.S. would quickly come to regret such a decision.

Saudi Arabia is the OPEC member that wants higher prices as it prepares for the listing of state oil giant Aramco. The last time the United Nations imposed similar sanctions on Iran in 2006, the price of oil shot up from $60 to $145 USA, the bank noted - although there were other factors at play at the time, too. At the session high, they touched their peak since November 2014 at $75.91.

Analysts warned that the deepening economic crisis in major oil exporter, Venezuela, threatened to further crimp its production and exports.

"It seems that the bureaucratic wheels are turning in Washington to prepare for a sanctions snapback", RBC Capital Markets analyst Helima Croft said in a note, adding that "the extraterritorial nature of USA sanctions, which cover energy, shipbuilding, finance, trade, insurance, etc., means that.Iran's oil exports could credibly be curtailed by 200,000-300,000 bpd". Venezuela's oil output has halved since the early 2000s to just 1.5 million barrels per day (bpd), as the South American country has failed to invest enough to maintain its petroleum industry.

Saudi Arabian energy minister Khalid al-Falih said he was concerned about possible shortages of spare crude production capacity.

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"If ConocoPhillips is successful, then it will limit the revenues PDVSA will have and give them even more problems paying their bills and producing their oil", said Gene McGillian, manager of market research at Tradition in Stamford.

Also boosting prices is the widespread expectation that US President Donald Trump will withdraw from the Iranian nuclear pact. It was reported last week that OPEC compliance hit a new record high of 162 percent as the cartel pumped 32.12 million barrels per day this month, the survey found, down 70,000 bpd from March.

Prices are likely to be unpinned all week because the deadline for a decision on Iran is May 12. This is contrary to the global reflation trade that so many have been betting on over the past year and perhaps a warning sign on the sustainability of higher oil prices.

However, a rise is expected in this year as the energy firms are keeping on drilling.

The increases came despite the addition of nine US oil rigs in the week to May 4, bringing the count to a three-year high of 834, according to energy services firm Baker Hughes.

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