Bullish Storage Reports from API, EIA Could Spike Oil Prices Through Last Week’s High

Just when you thought the renewed sanctions on Iran were already priced into the crude oil market, there are signs today that this may not be the case. Both U.S. West Texas Intermediate and international benchmark Brent crude oil futures contracts are trading higher on Tuesday. The catalyst behind the strength are expectations of tight supply despite OPEC increasing oil production to offset losses elsewhere.

Today’s re-imposition of U.S. sanctions on Iran remains the key event driving the upside momentum. One reason for this is the uncertainty over the size of the supply losses which range from 600,000 to 1.5 million barrels per day.

Bearish traders would be satisfied if the exact figure were known, preferably at the upper end of the range. Bullish traders like the uncertainty because this makes the short-sellers nervous enough to pay anything to get out of bad short positions.

Another reason for the uncertainty is the lack of 100% compliance with the U.S. government. Many European countries, China and India, oppose the sanctions and may face the wrath of the U.S. in doing so.

Earlier today, President Trump tweeted that “Anyone doing business with Iran will NOT be doing business with the United States.”

Furthermore, a senior U.S. administration official said on Monday, “It is our policy to get as many countries to zero as quickly as possible. We are going to work with individual countries on a case-by-case basis, but our goal is to reduce the amount of revenue and hard currency going into Iran.”

The general take by traders at this time is that crude prices are nearly balanced at this time due to a comfortable supply. While the sanctions may take away nearly 1 million bpd from the market, the shortfall is expected to be filled by increased output from Saudi Arabia, Russia, and the United States.

The balance, however, could be disrupted by potential sanctions by China against U.S. oil imports and unplanned supply disruptions.

Generally speaking, however, the increased production from the Saudis, Russian and U.S. leave the markets with a little spare capacity to deal with unforeseen disruptions.

We are experiencing the impact of lower production this week in the markets. Oil is being supported this week after Saudi crude production unexpectedly fell in July and U.S. drilling appeared to slow.

Saudi Arabia pumped around 10.29 million bpd of crude in July, down about 200,000 bpd from a month earlier. And took place despite a pledge by the Saudis and top producer Russia in June to raise output from July, with Saudi Arabia promising a “measurable” supply boost.

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Also last week, U.S. energy companies cut oil rigs for a second time in the past three weeks as the rate of growth has slowed over the past couple of months.

Additionally, last week, energy information provider Genscape issued a report that suggested crude oil stockpiles at the U.S. storage hub at Cushing, Oklahoma fell in the latest week.

Given the current firm trade in the crude oil markets, it looks as if storage reports from the American Petroleum Institute late Tuesday and the U.S. Energy Information Administration early Wednesday could set the tone for the rest of the week. The early price action this week suggests investors may be betting on an upside breakout over last week’s high at $70.43.