Oil extended gains after leaping to a six-month high on Monday as the US said it'll no longer give any buyer of Iranian crude a waiver from sanctions aimed at cutting the OPEC producer's exports to zero.
Futures in London added as much as 0.6%, a day after US Secretary of State Mike Pompeo said any nation that continues to buy Iranian oil will face American sanctions. In response, the Islamic Republic threatened to shut the Strait of Hormuz, a key waterway for Middle East crude. Meanwhile, Saudi Arabia said it will coordinate with other producers to ensure that adequate supplies are available.
Brent crude has rallied around 38% this year as OPEC and its partners embarked on a mission to cut output and avert a global glut, while disruptions in Venezuela, Nigeria and Libya have further squeezed supplies. The White House's decision to end exemptions for purchasing oil from the group's fourth-largest producer supports the bull case for oil, with RBC Capital Markets forecasting a loss of 700 000 to 800 000 barrels a day of Iranian exports.
"Oil quickly repriced higher on fears that markets could face an immediate supply crunch, adding more pressure to the already tenuous global supply squeeze," said Stephen Innes, head of trading and market strategy at SPI Asset Management. "This suggests that $80 Brent under current market conditions - something we thought unlikely only days ago - should now be considered a possibility."
Brent for June settlement climbed as much as 46 cents to $74.50 a barrel on the London-based ICE Futures Europe exchange, and was at $74.29 a barrel at 12:34 in Singapore. It rose $2.07 on Monday to $74.04, the highest close since October 31. The global benchmark crude was at a premium of $8.43 to US West Texas Intermediate.
WTI for June delivery rose as much as 40 cents to $65.95 a barrel on the New York Mercantile Exchange before trading at $65.85 a barrel. The May contract expired on Monday at a six-month high of $65.70.
Pompeo said he's confident that the oil market will remain stable and that Saudi Arabia, the United Arab Emirates and the US will ensure an "appropriate supply" of oil. The White House granted six-month exemptions to eight buyers last year, allowing them to purchase limited amounts of Iranian oil. It won't renew the waivers when they expire on May 2.
Saudi Energy Minister Khalid Al-Falih said the kingdom and other suppliers will ensure the market doesn't get out of balance. The biggest member of the Organization of Petroleum Exporting Countries and the UAE can boost their combined output by about 1.5 million barrels per day within a short period, according to people who asked not to be identified as the information is private.
Meanwhile, a senior Iranian military official said the Islamic Republic will shut the Strait of Hormuz, a narrow waterway carrying a fifth of the world's traded oil, if it's prevented from using it, the state-run Fars news agency reported.
"In the event of any threats, we will not have the slightest hesitation to protect and defend Iran's waterway," the agency reported, citing Alireza Tangsiri, head of the Revolutionary Guard Corps navy force.