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Oil Rises Again on U.S.-Iran Tensions -- Update

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05/16/2019 | 04:20pm EDT

By Dan Molinski

-- Oil prices increased for a third straight day Thursday, driven by stock market gains on Wall Street and escalating skirmishes between Iran and U.S. allies that threaten to disrupt oil supplies and shipments in the Middle East.

-- West Texas Intermediate futures, the U.S. oil benchmark, ended 1.4% higher at $62.87 a barrel on the New York Mercantile Exchange, marking the biggest one-day gain in three weeks and the highest close since May 1.

-- Brent crude, the global oil benchmark, closed 1.2% higher at $72.62 a barrel on London's Intercontinental Exchange.

HIGHLIGHTS

Iran: Oil is 2% higher so far this week as investors start tacking on a risk premium to prices after a U.S. official said Iran was likely behind recent attacks on Saudi oil tankers in waters off the United Arab Emirates -- a claim Tehran has denied.

Also, Iran-allied Houthi rebels in Yemen fighting a Saudi-backed coalition claimed responsibility for an attack earlier this week on a major oil pipeline in Saudi Arabia. In an apparent counterattack Thursday, Saudi-led coalition warplanes bombed areas held by the Iran-allied rebels in Yemen on Thursday.

The rising tensions come after the Trump administration increased oil sanctions on Iran, saying that as of this month, no countries could buy Iranian crude oil without facing financial penalties. Iran responded by calling the sanctions "unacceptable," and indicated plans to begin to walk away from agreements made in a 2015 nuclear deal.

"As suggested this morning, we look for occasional minor skirmishes in the Persian Gulf to maintain significant risk premium for a while," said Jim Ritterbusch, president of oil trading advisory firm Ritterbusch & Associates. "But at the same time, we don't expect much additional risk insurance as we feel that Saudi production will slowly be ramping up in anticipation of a more significant supply disruption."

Inventories: With the focus on geopolitics, oil markets mostly disregarded a bearish weekly report Wednesday from the Energy Information Administration that showed U.S. inventories of crude oil hit a 20-month high of 472 million barrels. "Ultimately it appeared to be geopolitical forces that saw prices shrug off a couple of more bearish signals," analysts at JBC Energy said in a note to clients.

Backwardation: Rising prices for Brent also helped create so-called backwardation, when prices for delivery in the near term exceed prices for delivery several months from now. Brent's July delivery contract of nearly $73-a-barrel is several dollars higher than the $69 for the January 2020 contract. This motivates traders to sell oil right away rather than putting it in storage, and thus creates a tighter market. WTI, the U.S. benchmark, isn't seeing backwardation, with the front-month prices of about $63 similar to those six months out. This may reflect recent data showing bloated U.S. crude inventories.

INSIGHT

OPEC: Oil markets were beginning to gauge how the attacks on the Saudi oil tankers might impact an important meeting in late June of the Organization of the Petroleum Exporting Countries. The group, along with some non-OPEC producers including Russia, agreed in late December to cut oil production to reduce supplies and boost prices. Prices are now about $10 to $15 a barrel higher. "It is unclear what OPEC's decision will be in terms of supply cuts, and the decision will most likely depend on Iranian production and global supply-demand levels," said analysts at Austin, Texas-based Drillinginfo.

AHEAD

-- Baker Hughes is due to release its weekly rig-count report on Friday at 1 p.m. ET.

Write to Dan Molinski at Dan.Molinski@wsj.com

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