A worker walks inside the complex of Guru Gobind Singh oil refinery near Bhatinda in the northern Indian state of Punjab April 27, 2012. The refinery has been built in joint venture collaboration with Mittal Energy, owned by steel tycoon Lakshmi Mittal and India's state-run Hindustan Petroleum Corporation Limited (HPCL) and will be inaugurated by Indian Prime Minister Manmohan Singh on Saturday. REUTERS/Ajay Verma (INDIA - Tags: ENERGY BUSINESS COMMODITIES) - GM1E84S09SB02

Oil prices lifted at $80 a barrel on Monday due to the diplomatic crisis between Saudi Arabia and the West and two weeks before U.S. sanctions that will choke off Iranian crude supplies.

With supply losses in places such as Iran, the Saudi Energy Minister Khalid al- Falih informed that his country is aiming to raise output to compensate rather than unleashing a 1973-style oil embargo on Western countries.

After the killing of Saudi journalist Jamal Khashoggi, many lawmakers in the U.S. have advocated imposing of sanctions on the kingdom, to which Saudi Arabia has pledged to hit back against such sanctions with ’bigger measures’.

The current output of Saudi Arabia is 10.7 million bpd, according to Falih, which it will soon be increasing to 11 million bpd; while Riyadh’s capacity to increase the output is up till 12 million bpd.

Both international pressure and possibility of sanctions rides over Saudi Arabia continuously according to Commerzbank.

On one hand the Brent crude futures LCOc1 reached $79.94 a barrel by 1117 GMT rising by 16 cents, and on the other U.S. crude futures CLc1 touched $69.22 a barrel increased by 10 cents.

According to strategist Tamas Varga of PVM Associates, politics are playing a significant role, however Saudi’s decision to increase production is not justified with reference to next year’s supply/demand balance.

Analysts estimate 1.5 million bpd at risk given the U.S. sanctions on Iran’s oil sector will commence on November 4 this year.

It will take a month to estimate the quantity of Iranian oil that will be off market after which it will be easier to predict what to expect in the first quarter of next year, according to Varga.

Due to the cut off in Iranian exports, in June, the Organization of Petroleum Exporting Countries(OPEC) consented to boost supply to make up for the loss, however based on certain internal documents reviewed, it appears that the OPEC might be facing a challenge in doing so given that the increase in Saudi supply was offset by declines elsewhere.

Furthermore, according to the estimates of OPEC, the demand for next year is falling from an average of 32.8 million bpd this year to an average of 31.8 million bpd.

Emirates NBD Bank said in a note that the consequences of the U.S. – China trade war will start weighing in properly by the next year and are expected to hamper the oil demand as well.

 

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