Oil Set for Weekly Surge as Saudis Fail to Allay Supply Fears

Oil surged this week by the most in two months as Saudi Arabia’s assurance of increased output failed to assuage concerns that disruptions from Canada to Libya and Iran will strain global markets.

Futures advanced about 7 percent this week in New York, rising for a fourth quarter, as U.S. inventories slump. The U.S. Energy Department indicated on Thursday that buyers of Iranian crude could be allowed to reduce purchases gradually, softening an earlier target for a complete shut-off. Yet the gesture failed to curb prices, which remain near the highest in three years despite Saudi pledges to boost output.

Crude has rallied over 12 percent in the last two weeks as the U.S. signaled it will aggressively enforce sanctions on Iran, OPEC’s third-largest supplier, following President Donald Trump’s exit from a nuclear accord with the Islamic Republic. Despite Saudi pledges of extra supply, concerns are escalating that reduced Iranian output will further strain a market grappling with shrinking U.S. inventories, a Canadian oil-sands outage, as well as turmoil in Libya.

“The risks to global oil supply are piling up,” said Jens Naervig Pedersen, senior analyst at Danske Bank A/S in Copenhagen. “The potential loss of supplies from Libya and Iran has been a cause for jitters.”

West Texas Intermediate crude for August delivery traded unchanged at $73.45 a barrel on the New York Mercantile Exchange at 10:47 a.m. in London. Total volume traded was about 34 percent below the 100-day average.

Brent for August settlement, which expires Friday, gained 75 cents at $78.60 on the London-based ICE Futures Europe exchange. The contract is up 3 percent this week. The global benchmark was at a $5.13 premium to WTI for the same month.

The world’s two most important oil benchmarks are diverging as Saudi Arabia’s promise to fill any supply gaps weighed on the European marker, while shrinking inventories in the U.S. supported futures in New York. The spread between Brent and WTI settled at the narrowest since March on Thursday. The spread has collapsed since settling at $11.43 on June 7, the widest since February 2015.

A market structure known as backwardation, where near-term prices trade at a premium to later contracts, persisted this month. WTI for August settlement was about $1.60 higher than the September contract, indicating a supply shortage after Syncrude Canada Ltd. was said to cut volumes to customers after an unplanned outage in Alberta last week. Meanwhile, Brent for near-term delivery was only 26 cents higher than later cargoes, a much smaller premium than in the American market.

“The OPEC deal offers some comfort, especially if Saudi Arabia manages to deliver record-high output,” said Pedersen. “The risk is that there will not be enough oil to go round.”

In the U.S., the Energy Information Administration said nationwide stockpiles fell by 9.89 million barrels last week, more than the 3 million-barrel decline expected in a Bloomberg survey. Inventories in the storage hub at Cushing, Oklahoma, also contracted by 2.7 million barrels, while exports surged to the 3 million mark for the first time despite concerns about a pipeline bottleneck in the Permian region.

In Libya, forces loyal to Khalifa Haftar, a commander in the politically divided nation’s east, have handed over control of ports with a combined export capacity of 800,000 barrels a day to a self-declared National Oil Corp. in the eastern city of Benghazi. Recent clashes cost the country about 450,000 barrels of daily output, taking more oil off the market just days after OPEC reached a deal with allies to increase production.

Market news:

Iran’s position in the oil market is looking weaker than ever as a bruising OPEC meeting and the tightening net of U.S. sanctions leave it with fewer friends and fleeing customers. Saudi Energy Minister Khalid Al-Falih met with Secretary of State Mike Pompeo at the State Department on Thursday, where they discussed matters including energy security. Futures are up 0.8 percent to 494.8 yuan on the Shanghai International Energy Exchange, heading for a third monthly advance since the derivatives’ debut on March 26.