Oil scales over 7-year peak on political risks, supply crunch

© Reuters. FILE PHOTO: Towers and smokestacks are silhouetted at an oil refinery in Melbourne June 21, 2010. REUTERS/Mick Tsikas/File Photo

By Swati Verma

BENGALURU (Reuters) -Oil prices rose on Friday, hitting their highest levels in over seven years as ongoing global political turmoil fanned concerns over tight supply.

The benchmark contracts were on track for their sixth straight weekly rise, the longest run of weekly gains since October.

Brent futures rose $1, or 1.1%, to $90.34 a barrel by 01:50 pm ET (1850 GMT). The session high of $91.70 was the highest since October 2014.

U.S. West Texas Intermediate (WTI) crude futures gained 50 cents, or 0.6%, to $87.12 a barrel. The session high of $88.84 was the highest in over seven years.

Tight supplies pushed the six-month market structure for Brent into steep backwardation of $6.92 a barrel, the widest since 2013. This means near-term contracts are priced higher than those in later months, encouraging traders to release oil from storage to sell it promptly.

Major producers in the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, collectively known as OPEC+, have struggled to raise their production levels. The market has also reacted to attacks on United Arab Emirates by Yemen's Houthi group.

Prices drew support from concerns over a possible military conflict in Ukraine that could disrupt energy markets, especially natural gas supply to Europe.

"So far there has been no supply disruptions in Eastern Europe, so guess the risk premium related to those tensions is not so high, but some investors still prefer to hold their exposure," UBS analyst Giovanni Staunovo said.

U.S. crude futures briefly turned negative.

Matt Smith, director of commodity research at ClipperData, said a relatively softer U.S. rhetoric on Russia may have caused "some of the air being let out of the tires here on this crude rally.

"But the bigger picture here is that with all the geopolitical uncertainty and the supply side concerns, prices are continuing to just get swept along."

At its Feb. 2 meeting, OPEC+ is likely to stick with a planned rise in its oil output target for March, several OPEC+ sources told Reuters.

"This is because some key producers in the OPEC+ group, including Russia, continue to struggle to meet their output quotas," said Marshall Steeves, energy markets analyst at IHS Markit.

U.S. production has struggled its way higher even as the rig count has been rising, Steeves said, adding that we could see higher output this year. [RIG/U]