Oil Higher in Tuesday Trade

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange (ICE) edged higher Tuesday morning after mixed price activity, as Iran threatens "countermeasures" that include blocking oil flow through the Strait of Hormuz in response to U.S. sanctions, while Saudi Arabia indicates ample supply availability as it holds July production flat with June.

Iran's foreign ministry said Tehran would disrupt oil flow through the Strait of Hormuz—a narrow waterway between Iran and Saudi Arabia—if it's unable to sell its oil due to U.S. economic sanctions set to take effect Nov. 4. U.S. officials have told countries buying oil from Iran that they should zero out those sales ahead of the November deadline, with the U.S. Secretary of State indicating waivers would be allowed in some situations for a select number of countries.

"I don't think Iran is going to sit idly by and see their exports completely cut off and allow Saudi Arabia to fill the gap," said Andy Lipow, president of Houston-based Lipow Oil Associates. "One can expect that if the US is successful in reducing Iranian exports, Iran will try to use its proxies through the Middle East to create geopolitical tensions and disrupt supplies from other oil producing countries in the region."

While not predicting direct Iranian military action, Lipow suggested Iran could potentially use remote piloted drones to drop incendiary devices on refineries and oil fields. "It's happened before," Lipow said.

The International Energy Agency (IEA) reported Iranian crude exports declined by 230,000 barrels per day (bpd) in June versus May figures on an estimated 50% decline in purchases out of Europe. Analysts note the last round of sanctions from 2012 to 2015 halved Iran's crude exports. Iran is the third largest producer of the 15-member Organization of the Petroleum Exporting Countries (OPEC), with June output at 3.799 million bpd.

Heightened rhetoric between the United States and Iran follow recent comments from Saudi Arabia that ramping up production now is "without basis," with reports indicating Saudi output in July is flat with June at 10.5 million bpd. Saudi Arabia has pledged to deploy it spare capacity to make up for supply shortfalls, namely from Venezuela where output, last measured at 1.34 million bpd in June, is seen dropping below 1.0 million bpd by year's end.

The Saudis' comment come as Brent's forward curve has flipped from backwardation, a bullish market structure in which the futures contract nearest to delivery trades at a premium to deferred delivery, into contango for the first time since August 2017.

September NYMEX West Texas Intermediate (WTI) futures were up about 65 cents near $68.50 barrel (bbl), with the ICE September Brent contract up 60 cents at $73.66 bbl. NYMEX August RBOB contracts were 2.35 cents higher at $2.1149 and the August ULSD contract was about 2.5 cents higher at $2.1448 gallon.

Brian Whary can be reached at brian.whary@dtn.com