Crude rises as Venezuela sanctions stoke crude supply risk concern

May 22, 2018

TOKYO and NEW YORK (Bloomberg) -- Oil extended its three-year high as a new wave of U.S. sanctions on Venezuela stoked concerns over its crude production and as analysts forecast further declines in American stockpiles.

Futures in New York added as much as 0.7% after Donald Trump ordered sanctions on debt owed to Venezuela following the re-election of President Nicolas Maduro in an election that prompted scorn from the international community. Meanwhile, U.S. crude inventories were forecast to fall for a third week in a Bloomberg survey before government data due Wednesday.

Oil is trading at the highest levels since 2014 as geopolitical tensions, U.S. sanctions on Iran and plunging production in OPEC producer Venezuela raise concerns over supply. OPEC continues to tighten global inventories with output cuts due to last until the end of the year, although the International Energy Agency said Monday it expects some of the biggest oil-producing nations to meet any shortfalls.

“It was the U.S. that added to the already hefty geopolitical premium,” said Tamas Varga, an analyst at PVM Oil Associates in London. “Current U.S. foreign affairs will take its toll on oil prices.”

West Texas Intermediate for June delivery, which expires Tuesday, climbed as much as $0.48 to $72.72/bbl on the New York Mercantile Exchange -- the highest since November 2014 -- and traded at $72.48 in London. The more-active July contract rose $0.20 to $72.55. Total volume traded was about 9% below the 100-day average.

Brent futures for July settlement advanced as much as $0.69 to $79.91/bbl on the London-based ICE Futures Europe exchange, after gaining 0.9% on Monday. The global benchmark crude traded at a $6.99 premium to WTI for the same month.

Yuan-denominated futures increased 0.6% to 485.1 yuan/bbl on the Shanghai International Energy Exchange. The contract fell 0.8% on Monday.

U.S. Pressure

Trump issued an order prohibiting purchases of debt owed to Venezuela including Petroleos de Venezuela, the Latin American nation’s state-owned oil company. The move follows a first wave of restrictions last year that banned the purchase of new debt from the government.

Venezuelan crude output may drop below 1 MMbpd in the coming months from an April level of 1.5 MMbbl, Barclays said in a May 18 report, raising its 2018 forecast for Brent to $70/bbl from a previous outlook of $63.

The IEA has started discussions with major oil-producing countries about their ability “to make up the loss from Venezuela or elsewhere,” Executive Director Fatih Birol said in a Bloomberg Television interview. The Paris-based agency, as an energy security organization, is “ready to act if and when it is at all necessary,” Birol said.

In the U.S., crude inventories probably fell by 2 MMbbl last week, according to the Bloomberg survey of analysts. Stockpiles at the key pipeline and storage hub in Cushing, Oklahoma, may have declined by 250,000 bbl.

Oil Market News

U.S. Secretary of State Mike Pompeo demanded that Iran halt all uranium enrichment, stop its ballistic-missile program and give nuclear inspectors access to the entire country. President Trump retreated from imposing tariffs on billions of dollars of Chinese goods because of White House discord over trade strategy and concern about harming negotiations with North Korea. The five-year Brent forward price has jumped over the last month, outpacing the gains in spot prices

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