Oil traded above $85 a barrel and near a four-year high on Wednesday, supported by expectations that U.S. sanctions on Iran will tighten supply and strain the ability of Saudi Arabia and other producers to pump more.
Crude exports from Iran, OPEC’s third-largest producer, are already falling as the U.S. sanctions kicking in on Nov. 4 deter buyers. The drop in exports is reducing the impact of an OPEC production increase agreed in June.
Brent crude LCOc1, the global benchmark, was up 38 cents at $85.18 a barrel at 0833 GMT. It reached $85.45 on Monday, its highest level since November 2014. U.S. crude CLc1 was up 24 cents at $75.47.
Olivier Jakob, analyst at Petromatrix said, “Iran is the main supportive factor and is a test to the spare capacity of Saudi Arabia.”
With Iranian exports expected to fall further, analysts say there may not be enough spare production capacity in the short term to meet demand, potentially requiring large withdrawals from storage.
“The fact that Saudi Arabia has been timid in its reaction has reinforced the notion there is limited spare capacity available.” The Organization of the Petroleum Exporting Countries, plus allies including Russia, have been limiting supply since 2017 to get rid of a glut. They partially relaxed the cut in June, under pressure from U.S. President Donald Trump to cool prices.
OPEC has so far ruled out any further production increase, beyond delivering the boost agreed in June, despite prices rallying further and more pressure from Trump.
Russia’s energy minister, Alexander Novak, said on Wednesday the market has more or less stabilized but many uncertainties remain, including the sanctions on Iran, and could push prices higher.
Nonetheless, a strong dollar .DXY, which makes oil imports more expensive for countries using other currencies, as well as an industry report showing rising inventories in the United States limited the rally.
U.S. crude inventories rose by 907,000 barrels in the week to Sept. 28 to 400.9 million, the American Petroleum Institute said on Tuesday.
With oil prices soaring, there are concerns over their inflationary effect on demand growth, especially in Asia’s emerging markets where weakening currencies are further adding to high fuel import costs.
Add the trade disputes between the US and other major powers, especially China, and economic growth into 2019 could be eroded.
Growth in China’s manufacturing sector already sputtered in September as both external and domestic demand weakened, two surveys showed on Sunday.
In Japan, business confidence among big manufacturers declined in the last quarter its lowest in nearly a year, as firms felt the pinch from rising raw material costs and as global trade conditions worsened.
In a sign that the financial market is positioning itself for further price rises, hedge funds increased their bullish wagers on US crude in the week to September 25, data from the US Commodity Futures Trading Commission (CFTC) showed on Friday, increasing futures and options positions in New York and London by 3,728 contracts to 346,566 during the period.