Picture: ISTOCK
Picture: ISTOCK

London — Oil prices hit a three-and-a-half-year high on Tuesday, supported by tight supply and planned US sanctions against Iran that are likely to restrict crude oil exports from one of the biggest producers in the Middle East.

Benchmark Brent crude oil reached $78.60 a barrel, up 37c and its highest since November 2014. By 8am GMT, Brent was up 20c at $78.43. US light crude was 5c higher at $71.01 a barrel, also not far off its highest since November 2014.

World oil prices have surged by more than 70% over the last year as demand has risen sharply but production has been restricted by oil cartel Opec, led by Saudi Arabia, and other key producers, including Russia.

Now the US has announced that it will impose sanctions on Iran over its nuclear programme, raising fears that markets will face shortages later this year when trade restrictions come into effect.

"The commitment of Saudi Arabia and the rest of Opec to the production cuts is a major factor in supporting the price at the moment, as well as the possibility of reduced exports from Iran due to sanctions," said William O’Loughlin, investment analyst at Rivkin Securities.

Global oil demand is rising sharply. In China, the world’s biggest oil importer, refinery runs rose nearly 12% in April compared with the same month a year ago, to about 12.06-million barrels per day (bpd), marking the second-highest level on record on a daily basis, data showed on Tuesday.

The tightening market has all but eliminated a global supply overhang that depressed crude prices between late 2014 and early 2017.

Opec figures published on Monday showed that oil inventories in the Organisation for Economic Co-operation and Development (OECD) industrialised nations in March fell to 9-million barrels above the five-year average, down from 340-million barrels above the average in January 2017.

US crude is trading at a hefty discount to Brent, the international marker, thanks to sharp rises in US production to 10.7-million bpd, which has left the American domestic oil market well supplied.

US shale oil production is expected to rise by about 145,000 bpd to a record 7.18-million bpd in June, the US Energy Information Administration (EIA) said on Monday. The Permian basin in Texas, the biggest US oil patch, is expected to see output climb 78,000 bpd to a fresh record of 3.28-million bpd.