SINGAPORE (Reuters) – Brent crude rebounded above $123 on Friday after a sharp sell-off in the previous session, as rising tensions between Iran and the West fuelled an oil rally that has forced Western leaders to prepare a release of their strategic oil reserves.
Brent crude rose 48 cents to $123.08 a barrel by 0520 GMT, after settling down nearly $2 the previous session following a Reuters report that Britain and the United States were preparing to tap into their oil reserves.
U.S. crude climbed 36 cents to $105.47.
“We think that prices probably will continue to grind higher as we get closer to the sanctions deadline,” said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.
The sanctions vice was tightening on Iran, cutting it out of key global financial networks, but Tehran was taking urgent steps to withstand the pressure over a nuclear programme the West suspects was intended to produce bombs.
New Western sanctions, due to come into effect within a few months, were aimed at further isolating Iran by banning its oil shipments to Europe and prohibiting financial institutions from making oil transactions with the OPEC producer’s central bank.
The sanctions have helped boost Brent crude oil prices by nearly 14 percent so far this year, stoking fears that higher fuel prices could derail economic growth in the United States.
Reuters reported on Thursday that Britain had agreed to cooperate with the United States in releasing reserves in a bid to halt rising oil prices, but volumes and exact timelines have not yet been determined, sources said.
“Now that the seed of a strategic crude oil release has been planted in traders’ minds, this may act to impose an imaginary cap on the price of crude, with traders wary of taking long positions at elevated prices should the coordinated release come to fruition,” said Tim Waterer, senior forex dealer at CMC Markets.
The use of strategic reserves by consumer nations would follow last summer’s concerted 60-million-barrel release by the 28-member International Energy Agency (IEA), in a bid to fill the supply gap caused by Libya’s civil war.
The Paris-based IEA said last month it saw no reason to resort to SPR releases in the near future. Last year’s move was unanimously agreed among IEA members, but countries including Germany and Italy have voiced reluctance to tap reserves again.
Washington could be tempted to tap the 727-million-barrel U.S. SPR as retail gasoline prices have surged to their highest level ever for mid-March, near $3.80 a gallon, drawing consumer ire during a presidential election year.
The U.S. economy, the world’s biggest, is bouncing back from a prolonged slowdown, but surging pump prices could derail the recovery and annoy U.S. motorists, who consume around a third of world gasoline supplies.
U.S. economic data on Thursday was supportive for oil prices and added to a recent spate of good news about the pace of recovery.