Published: Fri, May 18, 2018
Economy | By Shawn Conner

Oil prices hit record high

Oil prices hit record high

Inventories of crude oil and its derivative products in the States were lower across the board last week amid rising exports. One reason for the significant jump may be pipeline bottlenecks in Texas and Canada.

World oil prices have risen more than 70 per cent over the past year because of the sharp increase in demand as well as production cuts by the Organisation of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia with other major producers, including Russian Federation. Gasoline and distillate stocks were expected to have fallen by 2 million barrels and 1.3 million barrels, respectively.

We expect crude oil prices to take some breather after the recent run-up. US crude futures hit a high just short of $72.

In its monthly report, the Paris-based IEA cut its forecast for global demand growth in 2018 to 1.4 million barrels per day, from a previous estimate of 1.5 million bpd.

Source U.S. Energy Information Administration Short Term Energy Outlook May 2018
Source U.S. Energy Information Administration Short Term Energy Outlook May 2018

Brent crude hit the highest level over the past three years shortly after US President Donald Trump announced the US was pulling out the nuclear agreement reached three years ago, and would re-impose its sanctions on the Islamic republic. Following Trump's announcement making good on that threat last week, prices surged further.

An International Energy Agency forecast for less robust energy demand overshadowed a USA government tally showing record overseas demand for American crude and declining domestic stockpiles of oil and fuels.

In the weeks before Trump's decision, hedge funds and others piled a record number of bets into bullish crude oil options.

WTI is now trading above $71.0.

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US light crude CLc1 was seen averaging $66.62 a barrel this year and $67.09 a barrel in 2019.

These bets are being made due to strong demand, not just fear of political destabilization, said Scott Shelton, energy futures broker with ICAP in Durham, North Carolina.

By Navneet Damani Oil prices rallied for much of the week and are near three-year highs.

Those on the front lines of the physical market are not convinced.

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Stronger oil prices are also spilling into other markets.

"There is a huge disconnect between futures and fundamentals", a trader with a Chinese independent refiner said.

Domestic US oil outout was also higher as were imports, but not by enough to offset the increase in sales to buyers overseas. The strength of Brent crude, now trading at almost $7 above USA futures, and $4 above Dubai, has made it hard to find buyers for grades priced off Brent. The EIA reported that USA crude oil imports averaged 7.6 million barrels per day last week, up by 278 thousand barrels per day from the previous week. About 10 percent of China's refining capacity is expected to be offline through June.

Last week, Trump pulled the United States out of a 2015 worldwide nuclear pact with Iran, and plans to reimpose USA economic sanctions on the country. On average over the past month crude oil imports averaged about 8.0 million barrels per day, 4.3% less than the same month a year ago.

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