More Gains for Crude as Iran Fires Back At US Oil Sanctions

More substantial gains for oil came on Wednesday, with U.S. crude surging 3.2 percent on the strength of familiar elements: a surprise drop in American stockpiles; the continued Canadian supply shortage; and of course the shock waves caused by U.S. president Donald Trump earlier this week telling companies to stop buying oil from Iran by November 4.

West Texas Intermediate settled up $2.23 to $72.76 per barrel, its best closing prices since November 26, 2014, while Brent rose $1.41 per barrel to $77.72.

Yet more reason for the gains was concern over Libya, which is experiencing a power struggle between the ruling government and rebels, making it unclear who will preside over the country's oil exports (although to date its two main eastern ports are operating normally).

However, this combined with Syncrude 350,000 barrel per day (bpd) supply outage in Canada and news from the U.S. Energy Information Administration that crude inventories dropped by 9.9 million barrels in the week through June 22 (analysts had been banking on a 2.6 million barrel drop) are temporary phernomena supporting prices; more important is how successful Trump will be in implementing his sanctions against Iran, and to what degree other countries will comply with his orders.

Henry Rome, Iran researcher at Eurasia Group, said in a note that "While we had always expected European buyers to reduce imports to near-negligible levels by November, this more aggressive tack from the Trump administration likely means Japan and South Korea will move more quickly to zero-out their imports too.

"On the other hand, China, India, and Turkey will likely balk at significant cuts to imports by November."

Indeed, Sunjay Sudhir, joint secretary for international cooperation at India's petroleum ministry, said on Wednesday that "India does not recognize unilateral sanctions, but only sanctions by the United Nations."

He added that the Indian government has so far had no "official contact with the US" on the issue of Iranian oil.

Still, while Eurasia Group does not think Iran's exports will dry up completely, it now believes the sanctions will remove 700,000 bpd from the market, instead of the 300,000-500,000 bpd it earlier predicted - which would support the recent initiative of the Organization of the Petroleum Exporting Countries (OPEC) to pump all out and for the U.S. to boost production yet further.

Now in full retaliation mode, but still with no recourse other than to complain about the state of affairs, Iran via an unnamed oil official told the Tasnim news agency on Wednesday that "Iran exports a total of 2.5 million bpd of crude and condensate, and eliminating it easily and in a period of a few months is impossible" - which, if Eurasia Group's predictions come true, is technically correct, but still of no tangible benefit to the Islamic republic.

As if to summarize the emerging sentiment of many analysts, Goldman Sachs on Wednesday recommended its clients to be long oil: "We see some upside to oil prices," said Sharmin Mossavar-Rahmani, the bank's chief investment officer.

Iran's rhetoric combined with other indications of a global market tightening are presumably music to the ears of Saudi Arabian producers, who earlier this week stated that they will increase production by 800,000 bpd in July, which will surpass the kingdom's previous high of 10.72 million bpd in November of 2016.