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Crude rebounds ahead of US non-farm payrolls

Brent crude futures settled at USD 123.43/bbl, up USD 1.09, paring losses after hitting an intraday low of USD 121.82. For the week, the contract rose 55 cents, after three consecutive weeks in the red. NYMEX crude futures settled at USD 103.31/bbl, gaining USD 1.84, after setting a session high at USD 103.40. For the week, the contract rose 29 cents, ending three successive weeks of losses. Brent crude's premium vs. WTI narrowed to USD 20.12/bbl.

In early Thursday trading, oil prices rose due to supply disruption fears on news that a major Chinese ship insurer will halt indemnity coverage for tankers carrying Iranian oil, a move that could create serious complications for Iran's oil exports after a EU embargo takes effect on July 1. China is the number one buyer of Iranian crude and the insurance move is the first sign Chinese refiners may struggle to obtain shipping and insurance coverage they need to keep importing from the Islamic republic. Japanese refiners also plan to cut crude imports from Tehran again in April as they back away from renewing annual contracts. Countries risk being cut off from the US financial system unless they can show they have taken steps to substantially reduce their reliance on Iranian oil, although we question Washington's resolve to target China and India, the Islamic republic's two biggest oil customers.

Iran's crude oil production could fall 1 mn bpd by the end of June to below USD 2.5 mn bpd, according to report issued by JP Morgan, which claims that refiners have cut back on oil deliveries from the country at a quicker pace than previously expected.

Adding to supply disruption worries, explosions had temporarily shut down both of the pipelines moving about 25% of Iraq's crude exports from Kirkuk to the Turkish port of Ceyhan on the Mediterranean. In addition, reports that a rocket fired from Egypt's Sinai desert struck the southern Israeli resort of Eilat on Thursday also fuelled the early rise in oil prices.

Furthermore, a report that Royal Dutch Shell will slash production from the Mars field, a major supplier of sour crude from the Gulf of Mexico, also added to supply uncertainties, especially for US crude. In other market news, Greece has discontinued oil imports from Iran this month, depriving the Islamic Republic of one of its most loyal European customers and leaving Greece, with its financing troubles, struggling to purchase elsewhere. In addition, exports of ultra-low sulfur diesel from Russia's Baltic port of Primorsk will be more than halved in April due to refinery maintenance work, industry sources reported. The bulls also took heart from a report that initial US jobless claims fell to nearly a 4-year low last week, spurring hopes that an improving labor market would help bulk up energy demand. The Labor Department’s report showed first-time claims for state unemployment benefits contracted to the lowest level since April 2008. This gave an early boost to the market, with additional support coming from short covering ahead of the 3-day Easter holiday weekend.

On the supply side, total US crude oil inventories have climbed by more than 16 mn bbl over the past two weeks, the biggest increase since March 2001. The rise eased concerns about supplies after a string of outages from the North Sea, South Sudan, and Syria as well as the potential loss of Iranian exports due to US and EU sanctions has pushed up Brent prices up 15% YTD.

Moving forward, with open cry markets offline in observance of the Good Friday holiday, we do not expect any major moves today, despite the non-market payrolls report due out this evening. More than likely, investors will not react to today’s report unless the numbers turn out to be inordinately good or bad. We expect the US economy to have created some 205,000 jobs last month, which would be the fourth straight month of gains topping 200,000 since 1999. We also expect the unemployment rate is expected to hold at a 8.3% in March. Again, given the timing of the report, we believe it will have a more muted impact this month, again unless the numbers are radically at odds with market expectations.