Oil continues rally at three-month highs amid regional supply worries

Iraq, Opec's second largest producer is said to have restored production from the Nassiriya oil field

Pipes are pictured at the El Sharara oilfield December 3, 2014. Deep in Libya's southern Sahara, men in army uniforms guard a pipeline at the El Sharara oilfield. Hundreds of kilometers to the north, rival fighters turn off the pumps to stop the oil flowing. The standoff over El Sharara illustrates the complex challenge United Nations mediators face in holding together a country heading towards a civil war between factions allied with rival cities scrambling for control. U.N. envoys plan to bring the Libyan rivals together on Tuesday for a dialog, but the conflict is spreading with both sides increasingly at odds over the OPEC country's vast oil resources. Picture taken December 3, 2014. REUTERS/Ismail Zitouny (LIBYA - Tags: POLITICS CIVIL UNREST ENERGY)

Oil rallied at three-month highs on Monday as supply from the Middle East continued to face constraints.

Brent was up 0.8 per cent trading at $68.74 per barrel at 1pm UAE time, while West Texas Intermediate was up 0.3 per cent at $61.93 per barrel at 4.03pm in the UAE.

Iraq, Opec's second-largest producer, is said to have shut down a refinery processing 25,000 to 30,000 barrels per day of crude at Nassiriya. The adjacent oilfield, which was reported to have been closed by protestors who cut off power to the facilities, was back online by Monday, according to sources cited by Reuters, who said it could take two days before output is fully restored.

Iraq's overall production and exports remained unaffected, the country's oil ministry said on Monday, noting that output from Basra would be substituted for any loss of production from the Nassiriya field.

Iraq remains tense after President Barham Salih offered his resignation in protest at the nomination of Assad Al Eidani, the governor of Basra, for the position of prime minister on Thursday.

Mr Al Eidani, who was a former minister for youth and sports, belongs to the Iran-backed Binaa bloc in the Iraqi parliament.

Production from Libya is also facing security challenges, with the state-run National Oil Corporation considering shutting down the Zawiya port as well as the adjacent refinery. A shutdown of the country's largest field, El Sharara, which supplies most of the crude to the refinery, could hurt Libya's oil industry and its wider economy badly.

The refining complex had a near miss when a missile almost hit the production facility on Thursday.

Zawiya is Libya's largest refinery and the NOC had plans to double refining capacity to 250,000 bpd from 120,000 bpd, amid plans to ramp up investment in both the upstream and downstream sectors of the country, NOC chairman Mustafa Sanalla told The National in November 2018.

Markets remained poised for further tightness as Opec+, the alliance of oil-producing nations led by Saudi Arabia and Russia, will begin cutting back 2.1 million bpd from January 1 onwards.

The Organisation of Petroleum Exporting Countries and its non-member allies agreed to deepen cuts at the group's annual meeting in Vienna earlier this month, with Riyadh shouldering 400,000 bpd of additional voluntary restrictions. The latest production agreement will keep Saudi production at 9.744 million bpd from the beginning of 2020.

Production cuts of 1.2 million bpd this year have contributed to a level of stability in oil markets, which have otherwise been affected by dampened demand growth as escalations in the trade dispute between the US and China continued throughout 2019.

However, Opec may need to boost production by a million bpd in the second half of next year in order to balance the market, consultancy Energy Aspects said in its forecast for 2020.

The London-based consulting firm does not see Iranian barrels returning to the market next year, as any new deal with the US that would remove sanctions would take a long time to negotiate.

"Iran wants any future deal agreed with the US to be ratified by the US Congress, to make it more durable," the report said.

Meanwhile, Saudi Arabia, which leads Opec and Kuwait said they would restart work on the Neutral Zone, which straddles their border, which could bring online a potential 500,000 bpd, if required next year.

Oil prices have remained buoyant since last week after the US Energy Information Administration reported a steeper-than-expected inventory drop of 5.467 million barrels for the week ending December 20, beating analysts' expectations.