Oil retreats from $70 ceiling on fading geopolitical risk premium

Questions continue to circulate over whether higher oil prices are a good thing in a market still dealing with a supply-side hangover.
By Daniel J. Graeber Follow @dan_graeber Contact the Author   |  Jan. 12, 2018 at 10:00 AM
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Jan. 12 (UPI) -- Crude oil prices dipped into negative territory on Friday on signs Washington would indeed extend waivers that let Iranian oil flow on the global market.

The price for Brent crude oil, the global benchmark, hit $70 per barrel for the first time since December 2014 partway through the trading day Thursday, but gave up nearly all of the gains by the close. The bounce-back from the flirtation with the psychological ceiling at one point in overnight trading left the U.S. benchmark, West Texas Intermediate, down more than 1 percent.

Traders and market watchers for much of the week said they expected U.S. President Donald Trump to go against the principles of the Joint Comprehensive Plan of Action and not extend waivers to Iran. The president must regularly weigh sanctions and not extending them would've pulled the estimated 1 million barrels of Iranian oil flowing in the global market.

A market surplus driven by U.S. shale oil and a previous strategy by the Organization of Petroleum Exporting Countries to defend a market share with robust production levels meant there was plenty of room for risk. With OPEC in its second year of an effort to drain that surplus, the risk tolerance is gone.

Overnight, several media outlets said Trump would indeed extend the waiver again for Iran. According to The Wall Street Journal, the president is expected to balance the decision with new measures targeting Iran's human rights record.

The price for Brent crude oil was down 0.35 percent at 9:19 a.m. EST to $69.02 per barrel. WTI was down 0.61 percent to $63.41 per barrel.

Giovanni Staunovo, a commodity analyst for UBS, told UPI there were a variety of factors apart from Trump's decision that were pulling oil prices into negative territory. After reaching $70, some profit-taking is expected. The head of Russian oil company Lukoil, Vagit Alekperov, meanwhile, said that if oil prices stay this high, the effort led by OPEC, but which includes Russia, will need to gradually come to an end.

"The decline comes in an environment of a falling U.S. dollar, which is an offsetting factor," he added. "Weaker USD tends to support prices."

Some of Russia's counterparts in OPEC, namely Iran, had expressed concern that the rally would stimulate U.S. shale oil production, which has balanced the effort to narrow the gap between supply and demand over the last year.

Markets may react later in the day when drilling services company Baker Hughes releases its weekly tally on exploration and production activity. Reported as rig counts, gains from the United States would likely drive prices lower as it would be a potential indicator of a future production increase.

A series of gas pipeline explosions Thursday in Nigeria, meanwhile, could spook the market. Nigerian crude oil production is sparred so far, though the OPEC members's national security earned it an exemption from the multilateral balancing act.

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