U.S. oil prices rose to a three-and-a-half year high on Thursday, bolstered by supply concerns due to U.S. sanctions that could cause a large drop in crude exports from Iran.
U.S. West Texas Intermediate (WTI) crude futures settled at $73.45 a barrel, up 69 cents, or 0.95 percent. It reached $74.03 earlier in the session, highest since Nov. 26, 2014.
The United States this week demanded all countries halt imports of Iranian oil from November, a hardline position the Trump administration hopes will cut off funding to Tehran.
On Thursday, officials said they would work with countries on a case-by-case basis. China, the biggest importer of Iran's oil, has not committed to the U.S. position.
"The sanctions are trying to isolate Iran a bit more, and that potentially cuts more oil off from the overall global arena as a whole," said Mark Watkins, a regional investment strategist at U.S. Bank Wealth Management.
"If you're having Iran's oil taken off the market, then you have a decrease in supply and by all means, that's going to put more pressure on the price of oil to move up."
The U.S. demands follow a decision by the Organization of the Petroleum Exporting Countries last week to increase production to try to moderate oil prices that have rallied more than 40 percent over the last year.
Oil prices have rallied for much of 2018 on tightening market conditions due to record demand and voluntary supply cuts led by OPEC and other producers including Russia.
Unplanned supply disruptions from Canada to Libya and Venezuela also have supported prices.
U.S crude futures also extended gains after data showed inventories at the Cushing, Oklahoma, delivery hub fell by 3.1 million barrels in the week through June 26, traders said, citing data from market intelligence firm Genscape.
Front-month WTI's premium to the second month surged to a session high of $1.73 a barrel after the data, while U.S. crude's discount to Brent also narrowed to the smallest in three months at $4.32 a barrel.
Not all indicators point toward an ever-tightening market. U.S. crude production is approaching 11 million barrels per day (bpd), and Saudi Arabia expects to match that in coming months as well.
But analysts say the market has little spare capacity to deal with further disruptions.
"With inventories still declining and spare capacity uncomfortably low, there is very little cushion for any supply disruption caused by rising geopolitical risks," ANZ bank said.