Surprise Crude Inventories Draw Drives Oil Higher

West Texas Intermediate crude surged higher after crude inventories declined by almost 4 million barrels, indicating we could be seeing a tighter oil market. Crude prices are stabilizing after making a 5-week low and could see further upside if trade talks do not completely fall apart this week. Oil could see buyers return on spare capacity concerns. Geopolitical risks such as Russia’s oil contamination issues, Venezuelan and Iranian sanctions, along with fighting in Libya, could keep crude supported. The Canadian dollar was little changed on the day, not seeing any major benefits from oil’s rebound.

One key story that could greatly influence oil prices over the next couple weeks involves Iran. Iran’s partial withdrawal from a landmark nuclear deal is putting pressure on European and Asian nations to ease restrictions on their Iranian banking and oil sectors. Iran is giving Britain, France, Germany, China and Russia a 60- day deadline, otherwise they will remove caps on uranium enrichment levels and resuming work on its Arak nuclear facility. The US sanctions are having a strong impact to the Iranian economy which is expected to see their recession deepen.

European officials have been critical against President Trump’s decision to reimpose sanctions and ultimately end the accord that was reached under President Obama. If we see some support given to Iran, Trump may answer back with sanctions to countries who help Iran.

Over the next 60 days, we can see the Iran story either lead to further economic weakness to the Gulf Cooperation Council (GCC) or it could lead to a military clash. A growing risk could be Iran’s closing of the Strait of Hormuz, which handles about two-thirds of the world’s seaborne cargoes of crude oil and other petroleum liquids.

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