By Barani Krishnan
Investing.com - Now that the Saudis have President Donald Trump where they want him, they're likely to milk his decision to ban Iranian oil for whatever it's worth before slowly releasing more barrels of their own to the market.
New York-traded West Texas Intermediate crude settled up 75 cents, or 1.1%, at $66.30 per barrel. That extended Monday's 3% rally sparked by Trump's decision not to renew sanction waivers for importers of Iranian oil.
London-traded Brent settled up higher by 47 cents, or 0.63%, at $74.51 a barrel.
WTI is up 46% year to date, while Brent has risen 38.5%. Gasoline futures have jumped even more, by 59%. According AAA, the national average for gasoline at U.S. pumps was at $2.849 per gallon, rising for a record 70th day. The average is up 25.7% on the year, with $3 a gallon in sight. The average price in California is now about $4.03 a gallon, AAA's data show. AAA's data show the highest national average price was $4.114 in July 2008.
Now that Trump has put into action his plan to bring Iranian oil exports to zero, he expects OPEC+ members, which include Russia, to quickly reverse their production cuts, as well as replace lost barrels from Iran and other sources such as Venezuela and Libya.
The president wants cheaper gas prices for his 2020 reelection campaign. But Riyadh isn't making any promises.
Saudi Energy Minister Khalid al-Falih said on Monday the kingdom will work to ensure the availability of oil supplies and the lack of market imbalance following the end of the U.S. sanction waivers on Iran. Decoded of political niceties, his remarks meant that whatever oil flowed to the market will be OPEC’s call, certainly not free-flowing or at consumer-preferred prices.
And fund managers are expected to make it a perfect storm for oil importers by chasing crude prices higher until there is, to borrow a page from the Saudi playbook, enough evidence of “market rebalancing.” The difference is that to change the direction of the market, the proof required this time will be that there’s an abundant flow of oil again, versus the notion of tight supply that the Saudis were desperate to create just months ago.
It will be difficult to see abundant supply at least through the summer, as the U.S. driving season hits its peak and separate U.S. sanctions on Venezuelan oil and a civil war in Libya further hit crude availability.
Saudi Arabia and OPEC "will wait to see what barrels will actually come off before they make a move," said Phil Flynn, senior energy analyst at The Price Futures Group brokerage in Chicago.
"They will not raise output preemptively," Flynn added. "Of course, by the time they confirm (more delivery), oil might be at $75 a barrel WTI. In fact, do not be surprised if the Saudis and the UAE let the Trump administration squirm a bit to send them a little payback for tricking them into raising production last year."
Indeed, WTI raced to a six-month high of $66.60 in Tuesday's session, while Brent hit a five-month peak at $74.73.