Oil gains after surprise drop in Saudi crude output

A man pumps gas into his car at a gas station in Caracas

The U.S. -China trade war, however, has "caused investors to continue to trim net length, take profits and de-risk that position with the sense that oil's upside is limited unless there's material reduction in Iranian barrels", Tamar Essner, analyst with Nasdaq Inc.in NY, told Bloomberg.

Crude oil prices are catching some lift in the week's early trading, with WTI barrel prices pushing over the 68.75 level as Saudi output begins to slide while U.S. drilling efforts stall out.

Beijing-Iran's single biggest oil customer-has declined a request by US envoys to stop importing crude oil from Iran, but has reportedly agreed not to increase its imports of Iranian crude, according to sources who spoke to Bloomberg last week.

U.S. West Texas Intermediate (WTI) crude futures rose $1.23 to $69.72 a barrel, a 1.8 percent gain.

The U.S. sanctions against Iran, which shipped out nearly three million barrels per day (bpd) of crude in July, officially came into effect at 12.01 a.m. U.S. Eastern time (04.01 GMT) on Tuesday.

"The US seems hell-bent on regime change in Iran", said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

Many countries, including USA allies in Europe as well as China and India, oppose the sanctions, but the US government said it wants as many countries as possible to stop buying Iranian oil.

"Many countries, including Europeans, disagree with the US sanctions and are willing to work with Iran", said the official, who asked not to be named.

United States investment bank Jefferies said in a note that "the Saudi and Russian production surges appear to be more limited" than initially expected, adding that bullish market sentiment was also fuelled by the imminent reinstatement of USA sanctions against Iran.

This would leave markets with little spare capacity to deal with unforseen disruptions, it said.

That came despite a pledge by the Saudis and top producer Russian Federation in June to raise output from July, with Saudi Arabia promising a "measurable" supply boost.

Oil prices "may also be finding support from oil transport infrastructural problems in the US", said Commerzbank analysts in a note.

But US bank JPMorgan said a warmer-than-usual fourth quarter could stem from a potential El Niño weather pattern that "can cause droughts, flooding and other natural disasters across the globe, including heatwaves in the US that affect commodities".

This is not about bombarding the market with oil and pushing the price into the $50s, it is about preparing the market and easing the transition, he said.

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