Crude oil rose for a fifth day yesterday, on track for its strongest first quarter in eight years, thanks to a growing belief among investors that the Organisation of Petroleum Exporting Countries’ (OPEC) supply cuts will prevent a build-up in unused fuel, though concern over China’s economy tempered gains.
The development is a boost to the efforts of the federal government to fund the 2019 budget, which is predicated on the oil price of $60 per barrel.
United States sanctions against Iran and Venezuela have also helped to boost prices of crude oil to their highest levels since November 2018.
While the United States West Texas Intermediate (WTI) rose by 0.8% to hit $56.13 before dropping to $55.97, the global benchmark crude, Brent rose by 0.6% to $66.65 before it settled at $66.44.
For both benchmarks, these were their highest levels since November 20, 2018.
Crude oil has risen nearly 25% so far this year and is on course for its strongest first-quarter performance since 2011, thanks largely to a commitment by OPEC and allies to cut output.
Reuters reported that refiners around the world have to pay more to secure supplies of the medium, or heavy, sour crudes produced by Iran and Venezuela, both of which are under United States sanctions.
The US Treasury Department had announced sanctions that effectively halted purchases of oil from Venezuela, as part of an effort to push out the country’s President, Nicolás Maduro, in favour of his rival, Juan Guaidó.
About 40% of Venezuela’s oil is sold to the US.
The US had claimed that Maduro and his inner circle diverted billions of dollars in Venezuela’s national oil company, PDVSA’s profits to their personal accounts and to pay off military officers said to be propping up Maduro’s government.
Under the restrictions imposed by the administration, US companies can still buy oil from the Latin American country, but all proceeds would go into a “blocked” account and be inaccessible to Maduro.
lso under the sanctions, any further US payments would go not to Maduro but into bank accounts that could be used by Juan Guaidó, Venezuela’s self-proclaimed interim president.
In the absence of Venezuelan oil, President Donald Trump’s administration is considering tapping into the country’s emergency reserve of crude.
The Strategic Petroleum Reserve is held in underground caverns in Louisiana and Texas, and holds about 649 million barrels of crude.
OPEC and some non-OPEC producers like Russia, agreed late last year to cut output by 1.2 million barrels per day (bpd) to prevent a large supply overhang from swelling more.
But further pushing up crude prices have been US sanctions against oil exporters and OPEC’s members – Iran and Venezuela.
At least partly offsetting supply falls has been a surge in US crude oil production by more than 2 million bpd in 2018, to a record 11.9 million bpd.
And there are signs that US output will rise further.
US energy firms on February 12 increased the number of oil rigs looking for new production by three, to a total of 857, energy services firm Baker Hughes said in a weekly report on February 15.
The implication was that the US rig count was higher than a year ago when fewer than 800 rigs were active.