Oil prices rally to their highest level in three months

US sanctions on Venezuela and Iran have led to the latest surge

The US-China trade war kept Brent in a tight band between $60 and $70 per barrel over the last two months. Getty

Oil prices have rallied to their highest level in three months, recouping earlier losses bolstered by a decline in production in Venezuela, Opec supply cuts and the prospect of a breakthrough in trade talks between the US and China.

Brent futures hit a high of $66.78 per barrel on Monday, while West Texas Intermediate, the benchmark used for North American crude, surged past $56 per barrel for the first time this year.

The rally comes after oil prices tanked dramatically towards the end of last year, after surging to $86.29 per barrel in October before declining to a low of $50.47 per barrel in December. The fall came amid surging supply from the US shale basins, which propelled the country to become the world’s top producer by the end of the year.

Analysts such as UBS’ Giovanni Staunovo expect the latest rally to be sustainable. However he cautioned that volatility will continue to dominate momentum.

"We continue to expect Brent to move to the $70-80 per barrel range...we believe the rally should be sustainable. However, as we have seen this year it is not a straight move up to that range, but it comes with volatility in both directions,” he said.

US sanctions against Opec member Venezuela have tightened supply, which is expected to remove 300,000 to 500,000 barrels per day of exports from the global oil markets.

Also weighing on the markets are restrictions on Iran by Washington, which is unlikely to renew waivers on countries importing from Tehran in May.

The Trump administration had in November allowed some of Iran’s existing buyers to continue importing, with the proviso that they would gradually reduce shipments.

Market tightening will continue to happen because of losses in the “fragile three” - Iran, Libya and Venezuela, cautioned Mr Staunovo, while noting that he expected Opec+ production compliance to improve over the coming months.

The alliance led by Saudi Arabia and Russia is undertaking production cuts of around 1.2 million barrels per day from January until June.

"We expect Opec+ compliance to improve thanks to Saudi Arabia's pledge to scale back output to 10.1 million bpd in February and 9.8 million bpd in March and larger cuts promised from Russia over the coming months,” said Mr Staunovo.

The US trade dispute with China also weighed on oil prices. The Trump administration has set March 1 as the deadline to come to an agreement on a trade deal, which according to some reports is within reach. Trade disputes are likely to affect oil prices for the foreseeable future, BP cautioned in its latest energy outlook.

Reduced openness of the global economy will lead to a slight reduction of around 0.3 percentage points per annum in global gross domestic product growth, with increased concerns about energy security likely to add a 10 per cent risk premium to imported sources of fuel, the oil major noted.

The trade deal could impact the market positively, supporting risk sentiment, said Mr Staunovo.

"That said, while trade war concerns likely will continue to influence financial markets, for crude oil we believe the supply side is more important as a near-term driver for prices. Thanks to a strong decline in Opec+ output, the oil market is likely to tighten up over the coming months,” he added.