Oil rises as energy supply crunch and market tightness maintain bullish course
Although prices started the day with some minor losses as a stronger dollar raised some eyebrows, the dip was short-lived and gains quickly returned when the market focused on the bigger picture, that of a super-tight market amid a global energy supply crunch.
In fact there is little that can tilt oil prices away from their upwards momentum on the short-term as the only real supply source of significance is OPEC+, and there doesn’t seem to be much mood for policy change on that front for the moment.
If today’s API report, and tomorrow’s EIA official report confirm a continued draining of stocks at Cushing, there will be more upward potential for WTI and a continued narrowing of the Brent-WTI spread in the tight oil market.
The vaccine success and reopening of social activities has enabled the US economy, and oil consumption, to flourish faster than in other regional markets, and production, hampered most recently by Hurricane Ida, hasn’t been able to keep up with the pace of refinery intake.
Any US-based supply disruption on the scale of the winter freeze of February 2020 would also push WTI into significant gains.
Despite the initial soft signals in today’s trading, the energy crunch is still nowhere close to subsiding, so we expect prevailing strength in oil prices in November and December as supply lags demand and as OPEC+ stays on the sidelines.
The energy crunch, in particular in natural gas, will continue to support the overall bullish sentiment in oil prices in the short-term.
Since closing last Friday, the NYMEX natural gas price has gained 15%, a reflection that investors are very much convinced that natural gas prices will go higher as supply remains constrained, which will provide upside for oil as it is used more in fuel switching.
There are only two offramps to the current bout of oil price volatility and one is OPEC+ taking supply action, but the group has repeatedly said it does not plan on altering its strategy.
Else, another round of Covid-19 breakouts and lockdowns could again dim the demand outlook, but it seems to be a last resort strategy for many economies that are tired of repeating the unpopular economy-damaging process.
Nevertheless, Increasing infections in Eastern Europe and a re-lockdown in Russia could already be eating up oil demand, and any resurgence in China or the Asian continent would carry similar downside risk for oil prices.
In normal market conditions, a $90 barrel Brent would put OPEC+ market share at risk, but in the messy transitory pandemic supply environment, OPEC+ is managing an almost unheard of feat of stoking high oil prices but also keeping its production dominance.
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