West Texas Intermediate (WTI) rocketed to a fresh seven-year high above US$92 a barrel, and almost every indicator is pointing to the rally extending.
The market’s structure is trading at its strongest level in years, indicating scarce supply, while diesel — the fuel that helps power the global economy — is also surging as a cold snap hits the US and demand soars.
Inventories at key storage hubs are waning, and vital price gauges indicate an expectation that the tightness should persist.
Photo: AP
Traders increasingly suspect demand is being underestimated as economies emerge from COVID-19.
Saudi Arabia’s state oil company said late last month that consumption would soon return to levels seen before the COVID-19 pandemic, although International Energy Agency data showed that it would be about 1 million barrels a day lower in the first quarter than during the same period in 2019.
The outlook for a tight oil market is being reflected in high prices at the pump.
In the US, retail gasoline prices surged to the highest since 2014, climbing to US$3.42 a gallon, according to AAA.
This poses a political challenge to US President Joe Biden as he tries to combat surging fuel costs.
Meanwhile, supply outages from Libya to Ecuador to Nigeria have limited production of the light-sweet oil that underpins global crude benchmarks.
There is also a growing geopolitical risk premium as Russia amasses troops near Ukraine, although Russian President Vladimir Putin has said his country has no plans to invade.
“The rally in crude prices is showing no signs of slowing down, as both supply and demand drivers remain very bullish,” Oanda Corp senior market analyst Edward Moya said. “Geopolitical risks that include Russia-Ukraine tensions and Iran nuclear talks are also wild cards for oil prices as they seem more likely to lead to a tighter market over the short-term.”
All of that is coming as OPEC+ struggles to lift output by the 400,000 barrels a day it has pledged each month.
Last month, OPEC’s 13 members added just 50,000 barrels a day, fanning trader concerns that the market’s spare capacity buffer is dwindling.
The rally means that a return of US$100 oil is growing increasingly likely by the day. For months, options markets have been abuzz with trading of contracts above that level.
There are the equivalent of almost 112 million barrels of US$100 calls for the global Brent benchmark over the next 12 months. Call options sold by banks in the US$90s are also likely contributing to oil’s increase.
WTI for March delivery gained 2.26 percent to US$92.31 a barrel, rising 6.32 percent on the week — its seventh straight weekly gain.
Brent crude for March delivery increased 2.37 percent to US$93.27 a barrel, up 3.6 percent from a week earlier.
One of the clearest signs of strength in refined fuels is diesel. Demand in the US in the past few weeks has been at, or close to, the highest level for the time of year in at least three decades.
Stockpiles on the US East Coast, the delivery point for the Nymex heating oil futures contract, are the lowest since April 2020, while in Europe they are the lowest at a key storage hub seasonally since 2008, Insights Global data showed.
“Refinery runs haven’t kept pace with the recovery in demand, so stocks have been drawn down and are tight,” Turner, Mason & Co oil market analyst Jonathan Leitch said.
Additional reporting by staff writer
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