Oil prices rally after big U.S. crude inventory drop

Crude Oil Daily Chart

Oil prices rally after big U.S. crude inventory drop

The oil market is on fire once again.

Refinery crude runs rose by 115,000 barrels per day, EIA data showed.

On Tuesday, a senior State Department official said that the White House demanded countries cut all imports of Iranian oil from November with no exemptions expected to be entitled.

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U.S. President Ronald Reagan called on Saudi Arabia to pump more oil during his tenure in the 1980s, tacitly to put pressure on the Soviet economy through lower oil prices. "The oil has to come from somewhere".

President Donald Trump last month announced that the United States was withdrawing from the Iran nuclear deal signed by the Obama administration in 2015, under which Tehran had agreed to limit its sensitive nuclear activities and allow worldwide inspectors in return for lifting of crippling economic sanctions. In practice, Saudi Arabia and Russian Federation will carry the biggest shares. OPEC shipments will rise to 25.66 million barrels a day in the four weeks to July 14 versus the period to June 16, according to tanker-tracker Oil Movements.

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Such a bold promise from Saudi Arabia would normally hurt prices, but oil bulls saw a silver lining. The official added that the group had not yet visited China or India.

But analysts say the market has little spare capacity to deal with further disruptions. However, that growth has its limits.

"The physical oil market is well supplied", said Konstantinos Venetis, senior economist at research firm TS Lombard, although he warned OPEC and Russian Federation were producing at near maximum output "leaving a thinner margin of safety for the future".

Nayara Energy, an Indian company promoted by Russian oil major Rosneft, is also preparing to halt Iranian oil imports from November after a communication from the government, a second source said.

Canada, another oil power, is grappling with problems of its own.

However, the surge in output does not need to exported, at least not right away.

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Most other members of the organisation have only negligible amounts of unused capacity that could be readily and reliably available to the market ("Oil Market Report", IEA, June 2018).

Earlier on Thursday, India's oil ministry was said to have asked local refiners to get ready for a "drastic reduction or zero" imports from Iran. India has been appreciative of the US's toughness on Pakistan, which was signalled with the South Asia review and the national security strategy. The worldwide community had expected sanctions waivers for some countries, a tactic used in the Obama era to avoid supply shocks.

"This is hyper-bullish", said Mike Wittner, global head of oil research at Societe Generale.

During the visit, India and Iran signed almost a dozen agreements, centrepiece of which was an agreement on development of Chabahar port.

Of course, it's not clear if all of Iran's customers will go along with Washington's demands given their insatiable thirst for crude.

Over the past several years, Korea has raised its reliance on Iranian crude. That's 27% higher than the same point previous year.

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Oil prices steadied on Thursday, with USA crude pulling back from 3-1/2-year highs, but supply remained tight with investors concerned by the prospect of a big fall in crude exports from Iran due to US sanctions.

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