Why are oil prices trading at 5-month highs?

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Oil held gains after rising to the highest in more than four months in LondonFrom Grant Smith: Oil held gains after rising to the highest in more than four months in London as ongoing tensions in Libya added to concerns over supply.

Brent futures added as much as 0.7 percent, approaching $71 a barrel. Libya’s internationally-recognized government vowed to counterattackagainst forces loyal to strongman Khalifa Haftar which are trying to enter the capital Tripoli. Saudi Arabian Energy Minister Khalid Al-Falih also said in a Bloomberg TV interview that the Organization of Petroleum Exporting Countries, which is cutting output, remains focused on bringing down inventories.

While volatile, Libyan output has been on the rise

Crude prices have continued to climb after their strongest quarter in almost a decade as OPEC and its allies curb output while economic and political crises squeeze supplies from member nations Venezuela and Iran. An escalation of the conflict in Libya, which pumped 1.1 million barrels of crude a day last month, risks creating a supply shortfall.

“In the event of renewed production outages in Libya, the oil market risks sliding into an even larger supply deficit in the second quarter,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt.

Brent for June settlement advanced as much as 0.7 percent to $70.86 a barrel on the London-based ICE Futures Europe exchange, the highest since Nov. 12. The contract added 1.4 percent to $70.34 on Friday, taking its weekly gain to 2.9 percent. The global benchmark crude was at a premium of $7.24 to WTI for the same month.

West Texas Intermediate for May delivery rose 29 cents, or 0.5 percent, to $63.37 a barrel on the New York Mercantile Exchange as of 9:07 a.m. local time. Prices rose 1.6 percent to settle at $63.08 on Friday, the highest closing level since Nov. 5.

Libya Fighting Erupts Again. Here’s the Oil Impact: QuickTake

Fighting on the outskirts of Tripoli showed no signs of abating despite appeals for calm by global powers and the United Nations. While the latest conflict is south of Tripoli — away from most of the main oil ports and fields — the risks of disruption rise the more inflamed the tensions get. Western Libya is home to the Zawiya oil terminal, the export point for crude pumped from the country’s largest field, further south at Sharara.

Oil’s gains are still being moderated by the ongoing supply boom from U.S. shale. American rigs climbed by 15 to 831 in the first increase since mid-February, according to data from oilfield services provider Baker Hughes.

The structure of the futures market is reflecting supply uncertainty. WTI’s front-month prices rose to a premium, or backwardation, of as much as 4 cents a barrel to the contract four months ahead on Monday. They then flipped back into a discount, or contango. A spot price that’s higher than the forward price indicates tighter supply.

The United States Oil Fund LP (USO) was trading at $13.36 per share on Monday afternoon, up $0.21 (+1.60%). Year-to-date, USO has gained 11.24%, versus a 8.38% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of Bloomberg.