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Brent ends Q1 up 14% on Iran, supply disruptions

Brent crude futures traded up 49 cents to settle at USD 122.88/bbl. In quarterly terms, the European oil benchmark gained USD 15.50 since January, the biggest quarterly rise since 1Q11. NYMEX crude settled at USD 103.02/bbl, up 24 cents on the day and USD 4.19, and up over 4% q-o-q. Oil traded higher on Friday as the growing threat of a disruption of Iranian exports exacerbated supply concerns.

Oil markets, spiked briefly in afternoon trade after the Obama administration issued a memorandum claiming there is enough global oil supply to allow countries to cut imports from 2 OPEC’s No.2 exporter. Obama is required by law to determine by March 30, and every six months after that, whether the price and supply of non-Iranian oil are sufficient to allow consumers to "significantly" cut their purchases from Iran.

The White House’s statement cleared the way for sanctions aimed at banks in countries that import Iranian oil. The law allows banks that settle petroleum-related transactions through Iran’s central bank to be cut off from the US banking system. The market read this as a ratcheting up of tensions with the Islamic republic, which pushed crude higher.

The impact of US and EU sanctions, aimed at reining in Tehran's nuclear ambitions, has driven up the price of Brent crude by more than 14% over the past three months, prompting the United States, Britain and France to explore the possibility of releasing oil from their emergency reserves.

Obama said that increased production by some countries as well as "the existence of strategic reserves" helped him come to the conclusion, which will allow Washington to move closer to sanctioning countries who still buy Iranian oil.

A OPEC production poll showed Iranian supplies have already felt the pressure of sanctions, compounding losses from Syria, Yemen, South Sudan and the North Sea. Overall production from the producer group rose in March, however.

Some of gains were erased heading into the closing bell as trader focus switched back to whether consumer nations would tap strategic stockpiles to bring down prices, which has given rise to concerns about the economy in the run-up to the US election.

Price support also came from data stateside, as the Thomson Reuters/University of Michigan consumer sentiment index rose to 76.2 from 75.3 at the end of last month. The gauge was expected to come in at 74.5 after a preliminary figure of 74.3, according to the median forecast. In addition, US consumer purchases gained 0.8% in February, the Commerce Department said, overshooting the 0.6% median gain forecast. These reports helped counter bearish data showing US Midwest manufacturing activity slowed in March.

Moving forward, we think the market will continue to navigate the tug-of-war between a threat to the Strait of Hormuz being closed and whether or not strategic oil reserves will be released. Meanwhile, new data emerged this morning to counter the assumption of a hard landing in China, as the country’s PMI high a 1-year high in March. This news sent Brent and WTI 56 cents higher to USD 123.44/bbl and USD 103.58/bbl, respectively.

The next big market-moving event will be the Labor Department’s employment report, due out on Friday, and which is expected to unveil the creation of 205,000 jobs after 227,000 were created in February. In the upshot, the confluence of positive market forces (Iran, China and US economy) vs. the negative side (release of strategic oil releases, inventories) tilts the scales slightly in favor of the bulls with both benchmarks likely to win back a dollar or so this week, unless reserve numbers sour and/or the Obama administration comes out with a specific timeframe for the release.