Oil races to $80 as US drilling rises

KELECHI EWUZIE with agency report
Oil prices steadied below 3-1/2 year highs on Monday as resistance emerged in Europe and Asia to US sanctions against major crude exporter Iran, while rising US drilling pointed to higher North American production.
Brent crude was up 20 cents at $77.32 a barrel by 1315 GMT and US light crude rose 10 cents to $70.80.
Both oil futures contracts hit their highest since November 2014 last week at $78 and $71.89 a barrel, respectively as markets anticipated a sharp fall in Iranian crude supply once US sanctions bite later this year.
It is unclear how hard US sanctions will hit Iran’s oil industry.
A lot will depend on how other major oil consumers respond to Washington’s action against Tehran, which will take effect in November.
China, France, Russia, Britain, Germany and Iran all remain in the nuclear accord that placed controls on Iran’s nuclear programme and led to a relaxation of economic sanctions against Iran and companies doing business there.
The surge in oil prices comes at a time of tight supply amid record Asian demand and voluntary output restraint by the Organisation of the Petroleum Exporting Countries and non-OPEC producers, including Russia.
Analysts say with a renewed output cut agreement in place through the end of 2018 that brings Libya and Nigeria into the fold, OPEC enters the new year brimming with confidence that its market rebalancing efforts will remain on track.
The primary restraints to prices going up even more are declining global oil demand; a flood of new crude production, the ineffectiveness of the OPEC-Russia agreement to cap oil production.
However, the International Energy Agency (IEA), the US Energy Information Administration (EIA), and OPEC all agree that demand has been growing.
In fact, all three have reported in recent weeks that the balance between supply and demand is arriving quicker than anticipated.
Second, there is definitely plenty of excess extractable volume worldwide, especially with the largess in shale and tight oil now available for pumping in the US.
Now, this oil in the ground will prevent prices from a medium-term race back up to the $100 a barrel range.
However, while it will discourage the most diehard believer in long-term, triple-digit oil pricing, it has no genuine effect on the current price unless it is actually lifted.
Natural field declines in several countries notably crisis-ridden Venezuela, and continued strong production discipline could likely be enough to keep the bloc’s output within the bounds of its ceiling under the deal.
For sure, OPEC has defied critics by maintaining extremely robust conformity with its quotas to date.
But with oil prices nearing a new high of $80 several analysts believe compliance could slip if some OPEC members are tempted to overproduce to capture more revenue.
“Compliance has been pretty good, but that is when prices were lower,” Hedgeye analyst Joe McMonigle said. “Now, prices are higher so I definitely see some compliance challenges ahead.”
At any rate, production restraint from OPEC, along with the 10 non-OPEC producers led by Russia that agreed to join the curbs, is but one part of the market balancing equation.
Factors outside the bloc’s control will likely determine the success of its efforts to rebalance the oil market.