Oil. Picture: REUTERS
Oil. Picture: REUTERS

London — Oil prices eased from three-and-a-half-year highs on Monday as resistance emerged in Europe and Asia to US sanctions against major crude exporter Iran, while rising US drilling pointed to higher North American production.

Benchmark Brent crude was down 40c at $76.72 a barrel by 8am GMT. US light crude oil was down 35c at $70.35.

Both oil futures contracts hit their highest since November 2014 last week at $78 and $71.89 a barrel respectively, as markets anticipated a sharp fall in Iranian crude supply once US sanctions bite later this year.

It is unclear how hard US sanctions will hit Iran’s oil industry. A lot will depend on how other major oil consumers respond to Washington’s action against Tehran, which will take effect in November.

China, France, Russia, Britain, Germany and Iran all remain in the nuclear accord that placed controls on Iran’s nuclear programme and led to a relaxation of economic sanctions against Iran and companies doing business there.

Some oil analysts have said they expect Iranian crude exports to fall by as little as 200,000 barrels a day, while others put the figure closer to 1-million barrels a day.

Greg McKenna, chief market strategist at futures brokerage AxiTrader, is at the top end of that range.

"Around a million barrels of oil a day is likely to disappear from global oil markets if the US sanctions on Iran bite," McKenna said.

"But it is still far from certain that they will bite in the way intended ... Germany has said it will protect its companies from US sanctions, Iran has said French oil giant Total has yet to pull out of its fields and all the while it seems the Chinese are ready to fill the void created by the US."

The surge in oil prices comes at a time of tight supply amid record Asian demand and voluntary output restraint by the Opec countries and non-Opec producers including Russia.

On Monday, however, markets were held in check by news of a rise in US drilling for new oil production.

US drillers added 10 oil rigs in the week to May 11, bringing the total to 844, the highest level since March 2015, energy services firm Baker Hughes said on Friday.

"Soaring US shale output will continue to put a cap on prices," said Hussein Sayed, chief market strategist at futures brokerage FXTM.