Oil near multi-year highs on ‘likely’ Iran sanctions

Soft US inflation lifts gold

LONDON, May 12, (RTRS): Oil prices steadied near 3-1/2 year highs on Friday as the prospect of new US sanctions on Iran tightened the outlook for Middle East supply at a time when global crude production is only just keeping pace with rising demand.

The United States plans to reintroduce sanctions against Iran, which pumps about 4 percent of the world’s oil, after abandoning a deal reached in late 2015 that limited Tehran’s nuclear ambitions in exchange for the removal of US and European sanctions.

The global oil market is finely balanced, with top exporter Saudi Arabia and No.1 producer Russia having led efforts to curb oil supply to prop up prices.

Benchmark Brent crude was down 20 cents at $77.27 a barrel by 13:30 GMT. On Thursday Brent hit $78, its highest since November 2014.

US light crude was down 10 cents at $71.26, having touched a 3-1/2 year high of $71.89 on Thursday.

Many analysts expect oil prices to rise as Iran’s exports fall.

Trend

“The up-trend remains strong and intact,” said Robin Bieber, technical chart analyst at London brokerage PVM Oil Associates.

Rainer Seele, Chief Executive of Austrian oil and gas company OMV, told German daily Handelsblatt that he expects prices to rise as the United States moves to reimpose sanctions.

“It is not yet clear which concrete sanctions the US will impose. But I expect the price of North Sea Brent to be closer to $80 than $70 a barrel,” Seele said in an interview.

US investment bank Jefferies said in a note on Friday that it expects Iranian crude oil exports to start falling in the next few months.

“We expect that around October Iranian exports will be down by 500,000 barrels per day (bpd) and eventually fall by 1 million bpd,” the bank said.

There are signs, however, that other members of the Organization of the Petroleum Exporting Countries (OPEC) will raise output to counter the Iran disruption.

Jefferies said that OPEC has the capacity “to replace the Iranian losses” but added: “Even if physical supply is held constant ... the market will still be faced with a precariously low level of spare capacity.”

Outside OPEC, soaring US crude oil production could help to fill Iran’s supply gap. US oil output reached another record high last week, hitting 10.7 million bpd.

That is up 27 percent since mid2016 and means that US output is creeping ever closer to that of top producer Russia, which pumps about 11 million bpd.

Meanwhile, gold was set for its first weekly gain in four weeks on Friday after soft US inflation data suggested that the Federal Reserve might show caution on the pace of interest rate rises.

The weaker-than-expected April consumer price data on Thursday helped to knock the dollar from 2018 highs and push US bond yields down. The dollar fell further on Friday. That benefits gold because a weaker dollar makes bullion cheaper for users of other currencies, while lower bond yields make non-yielding gold more attractive to investors.

“It (gold’s rise) was mostly a response to the consumer price data out of the US yesterday,” Capital Economics analyst Simona Gambarini said.

St Louis Federal Reserve Bank President James Bullard on Friday spelled out the case against any further interest rate increases. Rates may already have reached a “neutral” level that is no longer stimulating the economy, he said, and going further risks nipping off business investment that may follow the recent corporate tax cut.

Spot gold was up 0.1 percent at $1,322.90 an ounce at 14:20 GMT after touching its highest since April 25 at $1,325.96, nudging its 100-day moving average of $1,326. It was up 0.6 percent for the week.

US gold futures for June delivery had gained 0.1 percent to $1,323.30.

Gold has traded in a range of about $1,310 to $1,355 since hitting a 1-1/2 year high in January.

Prices appeared to be building positive momentum, ScotiaMocatta technical analysts said. Consolidation above resistance at the 100-day moving average might be a catalyst for more gains, MKS PAMP trader Tim Brown said.

Raise

But Capital Economics’ Gambarini said that with the Fed likely to raise interest rates three more times this year, gold was likely to end 2018 at $1,300.

Higher interest rates hurt gold because they push up bond yields and tend to boost the dollar.

Gold investors largely brushed off tensions in the Middle East after the United States ditched an accord designed to stop Iran from developing nuclear weapons and Israel attacked Iranian military infrastructure in Syria.

“Geopolitical concerns are still a concern but investors aren’t paying significant attention,” Think Markets chief markets analyst Naeem Aslam said.

“The dollar story is more prominent,” he said. A summit between the United States and North Korea to be held in Singapore on June 12 also eased fears of conflict.