Oil rises on inventory drawdown, Iran unrest

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United States crude oil inventories continued to fall in the week to December 29, with a new decline of 7.4mn barrels (mbs) to reach 424.5 mbs, which is very close to the five year average of 420 mbs.

Brent futures prices for the next six months are already trading in a backwardation of around $2 per barrel, which is consistent with a market that is already tight and undersupplied. US oil production C-OUT-T-EIA , driven largely by onshore tight shale oil fields, has risen by nearly 16 percent since mid-2016, to 9.75 million bpd at the end of previous year.

The agency said US crude oil production increased in 2017 by more than 384,000 barrels per day (BPD), to 9.2 million barrels per day (MMBPD), based on data through September and estimates for the remainder of 2017.

Potential supply disruptions have become more pronounced in recent months, as the global glut that plagued the oil market for years has steadily diminished. After taking advantage of low oil prices, according to data published by its National Energy Administration (NEA), China increased its Strategic Petroleum Reserve (SPR) by nearly 14% between June 2016 and June 2017.

The market has been in process of pricing in a ramped-up level of geopolitical risk following the anti-government protests in OPEC member Iran, which has more than offset any concerns about prospects for rising USA crude supply.

OPEC's cuts are helping reduce global inventories, even as production continues to rise in the United States. Fears have intensified that the Trump administration in the U.S. would not certify nuclear deal with Iran, hampering supplies from the Opec's third-largest crude producer.

Ole Hansen, head of commodity strategy at Saxo Bank, said: "The market has moved into a bullish corner and the question is whether there is any way out of that apart from having a correction".

At the time of writing, WTI traded at US$61.79 a barrel, while Brent crude was at US$67.87 a barrel.

But in doing so, the organisation risks tightening the market too much, sending prices sharply higher and encouraging a faster-than-expected acceleration in production from USA shale producers. This saw the price of a barrel drop dramatically from about $100 to a low $26.

"Renewed geopolitical risks (of which we have had plenty during the second half of 2017) are likely to be the key source of support and one which could upset our call for stable-to-lower prices during 2018", Hansen said.

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