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Oil nears two-year high as market bets on looming supply crunch

Oil pumps at sunset
The IEA said last week that oil demand is set to rise above pre-COVID levels by the end of 2022. Photo: Getty (Pramote Polyamate via Getty Images)

Oil prices have soared to near two-year highs supported by a recovery in demand from the coronavirus pandemic and a drop in US crude inventories.

Both benchmarks rose to record highs in recent days after hitting rock bottom last year as investors bet on looming supply crunch. Crude (CL=F) was trading up 1.1% to $72.91 (£51.70) and Brent (BZ=F) was up 1.2% to $74.87.

On Monday, US crude prices hit their highest level in over two-and-a-half years. Prices kept rising on Tuesday, adding nearly 2% to trade at $72.12 after the American Petroleum Institute (API) reported that inventories fell by 8.5 million barrels, according to sources.

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Oil prices have also been pushed higher as the threat of extra supply coming to the market from Iran faded.

Watch: We’re experiencing ‘fear of missing out’ in the oil market, says analyst

Last week, the US dashed hopes of Iranian crude exports returning. US secretary of state Antony Blinken said that even if America reached a nuclear deal with Iran, hundreds of sanctions on Tehran would remain in place.

Indirect discussions between the two nations resumed over the weekend, and Iran said on Monday it reached a deal with the US over lifting industrial sanctions including energy, Bloomberg reported.

Saeed Khatibzadeh, spokesman for Iran’s Foreign Ministry, told Bloomberg that "technical, political, legal and practical issues remain".

Crude oil was trading up 1.1% to $72.91 around 4:40PM in London. Chart: Yahoo Finance
Crude oil was trading up 1.1% to $72.91 around 4:40PM in London. Chart: Yahoo Finance

Analysts at ING also believe one concern for the oil market is the lack of investment and the implications this will have on oil balance in the years to come.

ING highlighted Angola, where production has been falling for years. Angola's production dropped below the agreed Organisation of Petroleum Exporting Countries and its allies (OPEC+) levels. ING says OPEC+ cuts could be a catalyst for the country's decline.

"In May Angola produced around 1.12 million barrels per day (mbd), whilst under the deal, they could have produced around 1.28 mbd. So, as we see OPEC+ easing output cuts it is safe to assume that Angolan oil output is unlikely to increase. If anything, it will probably continue to trend lower," ING said.

Read more: IEA: Oil demand will exceed pre-COVID levels by end of 2022

It comes after the International Energy Agency (IEA) last week said oil demand is set to rise above pre-COVID levels by the end of 2022.

The Paris-based body expects consumption to rebound by 5.4 million barrels per day (bd) this year as vaccines are rolled out and economies reopen. Consumption declined by a record 8.6 million bd in 2020 as the coronavirus pandemic took a hold.

It expects a further 3.1 million bd increase in 2022, to average 99.5 million bd with an increase at the end of the year that will surpass the level of demand before the COVID pandemic.

Countries outside the OPEC+ group are expected to boost output by 1.6 million bd next year, to exceed 2019 levels. While, OPEC+ countries will have 6.9 million bd of spare capacity even after lifting production by 2 million bd over the May-July period.

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