Oil up as US sanctions on Iran expected to tighten supply

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LONDON (Aug 7): Oil prices rose on Tuesday with revived US sanctions against major crude exporter Iran expected to tighten global supply.

Brent crude oil futures were up 50 cents to US$74.25 per barrel at 0928 GMT and US West Texas Intermediate (WTI) crude futures were up 29 cents at US$69.30 a barrel.

A first batch of US sanctions against Iran, which shipped out almost 3 million barrels per day (bpd) of crude in July, officially came into effect at 12:01am US Eastern time (0401 GMT) on Tuesday.

The reimposed sanctions target Iran's US dollar purchases, metals trading, coal, industrial software and its auto sector.

"It is a reality check that this is happening and that Iran's oil exports will be hurt when the oil sanctions hit it in November," chief commodities analyst at Commerzbank Bjarne Schieldrop said.

Many countries, including US 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.

"It is our policy to get as many countries to zero as quickly as possible. We are going to work with individual countries on a case-by-case basis, but our goal is to reduce the amount of revenue and hard currency going into Iran," a senior US administration official said on Monday.

"A full embargo seems unlikely and the oil market should remain well balanced in light of rising production and the emerging markets' fuel inflation pains," Norbert Rucker, head of macro and commodity research at bank Julius Baer, said.

HEAT IMPACTS OIL

Analysts also warned that a global heatwave could affect oil demand.

Much of the northern hemisphere has been gripped by extreme heat this summer, pushing up demand for industrial and residential cooling.

This mostly impacts demand for power fuels such as thermal coal and natural gas.

"With global demand remaining healthy and the global heatwave increasing oil demand, I think prices will remain well-supported in the near term," Hussein Sayed, Chief Market Strategist at FXTM, said.

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".

"Past instances of El Niño have resulted in sharp drops in US residential and commercial heating oil demand and prices," it said.