Crude oil has been quite volatile in the past few months ever since the US announced plans to impose sanctions upon Iran, which has triggered supply concerns. Analysts expect crude to stay within a range in the near to medium term.

In May, Brent crude had almost touched $80 per barrel, the highest level since 2014. By mid-August prices weakened to $74 per barrel and in the last two weeks crude made a comeback to $78 per barrel. In case of West Texas Intermediate (WTI) crude, prices touched four-year high of $74.03 per barrel in June. By mid-August WTI prices too fell and touched $65 per barrel. However, in the third week of August, prices bounced back to $70 per barrel.

Possible supply shortage started worrying the crude market when the US imposed sanctions on Iran on allegations that Iran was not complying with the clauses in the nuclear deal entered into in 2015 with five plus one world powers.

According to Hitesh Jain, analyst, commodities, India Infoline, Iran had produced around 3.8 million barrel per day in 2017 and had exported 2.4-2.5 million barrel per day. Since April this year, the exports have been falling and by June it stood at 1.9 million barrel per day.

Banks have been backing out of trade of Iranian oil and insurance companies have been reluctant to cover cargoes. Some of the European refiners have been cutting purchases of Iranian crude, thus leading to decline in exports.

“If the market is deprived of around one million barrel per day supply from Iran, it could tighten the supply in the oil market,” said Jain.

Venezuelan output also has been hampered due to insufficient investment. The country is suffering from sanctions from the US, which used to be one of its main buyers. Venezuela used to produce 2 million barrel per day and this has come down to around one million barrel per day. The rebel attacks, triggering supply worries, too disrupted operations at the ports of Libya.

However, by mid-August, the US government data showed a big unexpected jump in US crude stockpiles. While the US crude imports surged by one million barrels a day, exports fell by more than 250,000 barrel per day. This hit the refining activities in the US and led to drop in prices.

Around this time, the Turkish Lira too was falling and the ripples of the fall were visible across financial markets.

After the correction, crude oil prices once again started moving up in the last two weeks following the latest EIA report on a surprisingly strong decline in crude oil inventories. The US-China trade war and imposition of tariffs saw a spurt in commodity prices and this too supported crude oil prices.

“The oil market is expected to trade within the current range. Brent would move between $70 per barrel and $80 per barrel, and WTI would trade between $64 per barrel and $72 per barrel. While supply shortage from Iran supports upside in prices, Saudi Arabia, Russia and the US have the ability to fill the gap in supply caused by the sanctions on Iran. Hence any major upside cannot be expected,” said Jain.

sangeethag@mydigitalfc.com