Oil bulls are smiling to the bank as the price of the global benchmark for oil, the Brent oil futures now stands above the $80 range amid signs that demand is running ahead of supply and depleting inventories amid a global energy crunch.
Brent crude futures, the global benchmark for oil is up for the 6th consecutive day. It is bullish by 1.60% to currently stand at $80.08 a barrel, after reaching its highest since October 2018 at $80.35 in the Asian session.
U.S. benchmark, the West Texas Intermediate (WTI) crude futures is up by 1.16%, to currently stand at $76.61 a barrel, after hitting its highest since July 6. This benchmark is also up for the 6th consecutive trading day.
Oil’s latest upswing has come amid a flurry of bullish price predictions from banks and traders, further gains in natural gas and speculation that the energy industry isn’t investing enough in fossil fuels to keep supplies at current levels.
Recall that Goldman’s Sachs global head of commodities research, Jeff Currie, stated that the global benchmark could hit $90 per barrel if the approaching winter in the northern hemisphere proves colder than normal. This statement added more confidence to oil bulls as they pushed the price above the $80 mark, a price point Goldman predicted for the summer. Trafigura Group, one of the world’s largest commodity trading houses, is also forecasting higher oil prices.
Asides from Goldman and Trafigura Group, the Commonwealth Bank of Australia are also hinting at a bullish oil. An analyst, Vivek Dhar, said in a note that Crude demand could rise 500,000 barrels a day. He explained that this would tighten markets further, especially with OPEC+ making only conservative additions to supply.
While it is true worldwide demand has increased, the Organization of Petroleum Exporting Countries and its allies including Russia (OPEC+) have been easing supply curbs with great caution. Later today, the OPEC+ will release its World Oil Outlook, which will detail the group’s views on market fundamentals. Many analysts expect that it will even be more bullish than that of Goldman and Trafigura group.
Vaccination efforts and easing of lockdown measures
Oil has soared this year as the roll-out of vaccines to combat the pandemic aids energy demand, causing a drop in U.S. inventories. A dramatic surge in natural gas has stoked bets that crude will benefit from spillover demand as users seek alternatives.
John Driscoll, chief strategist at JTD Energy Services Pte stated, “It looks like the oil rally has still got some legs. Fundamentals are still pretty convincing, demand is recovering, backwardation is increasing. I just don’t see any evidence yet that the rally has topped out.”
The supply issues are occurring as countries ease their COVID-19 movement restrictions, potentially boosting demand. For instance, Japan, the world’s fifth-biggest oil user, plans to lift a coronavirus state of emergency in all regions on Thursday as the number of new cases falls and the strain on the medical system eases, Economy Minister Yasutoshi Nishimura said.
OPEC+ Struggles to Increase Output
Another factor to consider is top African oil exporters Nigeria and Angola are struggling to boost output to their quotas set by the OPEC+. They may not be able to do so until at least next year as underinvestment and nagging maintenance problems continue to affect output, sources at their respective oil firms warn.
Their battle reflects several other members of the OPEC+ group who curbed production in the past year to support prices when COVID-19 affected demand but are now failing to ramp up output to meet soaring global fuel needs as economies recover.
Hurricane Ida and Nicholas
Hurricanes Ida and Nicholas, which swept through the U.S. Gulf of Mexico in August and September, damaged platforms, pipelines and processing hubs, shutting most offshore production for weeks. This has added to the bullish outlook for oil as oil supply has been significantly affected in the region while global demand increases amidst global recovery from the pandemic.
According to the Energy Information Administration, “Gulf of Mexico federal offshore oil production accounts for 17% of total U.S. crude oil production and federal offshore natural gas production in the Gulf accounts for 5% of total U.S. dry production.”
According to Bloomberg, Oil’s time spreads have widened, signalling traders are more positive. Brent’s prompt spread was 82 cents a barrel in backwardation, from 63 cents two weeks ago. That’s bullish, with near-dated prices above those further out.