Crude prices surged by more than 3 percent on Tuesday after the U.S. State Department said it will require companies to cut all oil imports from Iran to zero by November.
The announcement exacerbates concerns about a shortage of oil at a time when Venezuela's production is in terminal decline and the market is grappling with short-term supply disruptions from Canada and Libya. Last week, OPEC and other producers including Russia agreed to raise output to prevent price spikes.
U.S. West Texas Intermediate crude futures ended Tuesday's session up $2.45 a barrel, or 3.6 percent, to $70.53, erasing earlier losses and breaking above $70 for the first time since May 25. International benchmark Brent crude was up $1.60, or 2.1 percent, at $76.33 per barrel by 2:29 pm. ET.
Oil prices rose further in late electronic trading, after API data showed a large decline in oil inventories of 9.2 million barrels in the latest week. Government supply data is expected Wednesday at 10:30 a.m. ET.
“The U.S. is continuing its decision to completely isolate Iran," said Gene McGillian, vice president of market research at Tradition Energy. “They’re ringing the bell even louder."
WTI intraday chart
President Donald Trump withdrew the United States from the Iran nuclear deal and restored wide-ranging sanctions against the Middle Eastern country in May, but the administration did not set a timeline for completely cutting Iranian crude imports.
Market-watchers questioned whether Trump would follow former President Barack Obama's model, which called on foreign companies to reduce their purchases by 20 percent every 180 days. But the State Department clarified on Tuesday that Trump expects buyers to entirely wind down those purchases by Nov. 4.
"This isn’t unexpected. These people seem strident in what they want to do," said McGillian. "What the effect is going to be is going to be the difficult thing to measure. It could point to more demand for U.S. oil."
Iran, OPEC's third-biggest producer, exports more than 2 million barrels per day.
John Kilduff, founding partner at energy hedge fund Again Capital, said Trump's decision appears calibrated to crush the Iranian regime, which has endured despite nearly 40 years of U.S. pressure.
"I’m seeing the companies — left, right and center — drop out from buying” Iranian oil, Kilduff said. "Total and Shell have announced they’re not buying it anymore, starting now."
Total CEO Patrick Pouyanne told CNBC last week that no major multinational oil and gas company can take the risk of running afoul of U.S. sanctions by doing business in Iran.
Earlier in the day, oil prices pulled back sharply following a report that Saudi Arabia aims to increase its output to record levels next month.
Following an agreement among oil producers to ease output caps that have been in place for 18 months, the Saudis intend to hike production from about 10 million barrels per day to 10.8 million bpd in July, Bloomberg News reported.
OPEC has faced pressure from big oil consumers such as India and China to tamp down oil prices after they recently rose to new 3½-year highs. Trump also called on OPEC to add more supply, as he faces the prospect of Americans holding him accountable for gasoline prices hovering near $3 a gallon.
Oil prices also got support on Tuesday from an outage at Canada's largest oil sands facility and concerns about Libya's crude exports due to developments in that country's ongoing conflict.
The commander of Libya's eastern political faction has transferred control of oil ports to a national company aligned with his faction, cutting off access to the supplies from the official oil authority in Tripoli, Reuters reported.