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                Oil Prices Hit Three-Year High on Geopolitical Risk; Concerns about rising tensions in the Middle East buoy crude prices

                Wednesday, April 11, 2018, 5:29 PM ET
                By Alison Sider

                Oil surged to the highest levels in more than three years as tensions simmered in the Middle East, signaling optimism that a glut that has crippled the market for years is ending.

                U.S. crude futures jumped $1.31, or 2%, to $66.82 a barrel Wednesday on the New York Mercantile Exchange . Brent, the global benchmark, rose $1.02, or 1.4%, to $72.06 a barrel on ICE Futures Europe. Both benchmarks are at their highest levels since December 2014.

                More than a year's worth of production cuts by the Organization of the Petroleum Exporting Countries has helped set the stage for this rally, gradually whittling away at a glut that kept prices low for more than three years. Venezuela's oil output is also in freefall as the country's economic turmoil deepens. With the prospect of renewed sanctions against Iran, some analysts and investors say prices are poised to climb even higher.

                Gary Ross, global head of oil analytics and chief energy economist at S&P Global Platts, has been predicting that Brent prices would rise to $75 to $80. He said Wednesday that a "perfect storm" of falling supplies and geopolitical saber rattling could push prices even higher.

                "What's unfolding is an extraordinarily vulnerable situation for the market—you're at great risk of a price spike if something unexpected happens," he said. "We have no cushion."

                After languishing for years, oil prices surged in the final months of last year.

                This year, crude has been a bright spot compared with other stagnating markets. The S&P 500, the U.S. stocks benchmark, is down 1.18% after a 19% rally in 2017.

                Still, gains in oil prices haven't been that impressive—in the first quarter, U.S. benchmark prices rose about 7.5%, and the global price rose about 5%. Prices have been firmly ensconced between $60 and $70.

                But the momentum shifted this week. Both benchmarks have climbed more than 7%—their best three-day period since December 2016.

                Escalating conflicts in the Middle East took center stage as tensions rose toward a boiling point. After an alleged chemical-weapons attack on a rebel-held Syrian town over the weekend, President Donald Trump warned Wednesday that U.S. missiles "will be coming" to Syria. And Saudi Arabia's air-defense forces said in state media that they intercepted a missile over the capital city of Riyadh, which helped ratchet prices even higher.

                Conflicts that could interfere with oil production have taken on renewed importance in the oil market in recent months as a glut that acted as a buffer against supply shocks has dissipated.

                The International Energy Agency said last month that petroleum stockpiles in the industrialized world—a proxy for global inventories—stood just 53 million barrels above the five-year average at the end of January, compared with a 302 million barrel overhang a year earlier.

                While Syria isn't a major oil producer, the U.S. taking a more active role in the Middle East raises the prospect of supply disruptions in the region, analysts said.

                But others say oil prices are likely to deflate as some of these factors wane.

                "The market's priced in a worst-case scenario in these countries—what if they just muddle along?" said Michael Cohen, head of energy markets research at Barclays PLC . Despite a "legitimate tightening," Mr. Cohen said he believes the risks to oil prices in the second half of the year are to the downside.

                Will Riley, a portfolio manager at Guinness Atkinson Management, said his fund is factoring in oil prices at a conservative level of $60 when it evaluates producers, describing that level as "fundamentally reasonable."

                U.S. producers haven't held back, taking advantage of higher prices to rocket the country's output to more than 10 million barrels a day. Output this year is expected to surpass a record from 1970 and is outpacing production rates from a few years ago when oil was $100.

                So far demand has been able to keep up with oil's slow and steady rise and has helped fuel the higher prices. With economies around the world firing on all cylinders, global growth has underpinned oil's rise and soaked up the extra output coming from the U.S.

                "Oil is rising, but it's not rising at a pace which creates significant shocks for the real economy," said Alan Ruskin , head of G-10 foreign exchange strategy and a macro strategist at Deutsche Bank . "The global economy is strong. The demand side is certainly solid. That's crucial."

                But there are risks on the horizon threatening the pace of global growth, and investors have started to question whether the economic comeback could start to hit roadblocks. Rising oil prices may not help. Higher prices could eventually hit consumers' wallets in a way that they haven't in years.

                This summer, when drivers tend to hit the roads for vacation and fuel consumption peaks, gasoline prices are expected to rise to their highest since 2014.

                The average U.S. household is likely to spend $190 more on fuel this year compared with last, according to the U.S. Energy Information Administration .

                Sarah McFarlane contributed to this a


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