Plenty of fuel left in oil rally as prices hit 3-year highs

An emerging energy crisis boosting natural gas prices and forcing users to switch fuels is coinciding with major drawdowns in crude inventories, supporting a rally across Brent oil, which analysts predict could tap $US90 a barrel this year.

Brent crude hit its highest level since October 2018, climbing 1.1 per cent to $US78.09 a barrel. West Texas Intermediate capped a run of five weekly gains, rising 0.9 per cent to $US73.98 a barrel.

It comes as markets recover from a tightening in supply, while demand rockets on the back of economies reopening, exerting upward pressure on the oil price.

“Rising prices are being driven by a deepening deficit that clearly isn’t going unnoticed by the market,” said Commonwealth Bank’s mining and energy commodities analyst, Vivek Dhar.

“There’s growing pressure that demand is outgrowing supply, and as global economies continue to recover and vaccination rates climb heading into the fourth quarter, markets are concerned that OPEC+ aren’t adding enough barrels to meet demand.”

This view has informed Commonwealth Bank’s prediction that Brent prices will average $US85 a barrel in the fourth quarter of this year.

Goldman Sachs upgraded its year-end price forecast to $US90 a barrel from $US80 a barrel on Monday, concluding that the current oil supply-demand deficit is larger than expected.

The broker emphasised the slow pace in which the Organisation of Petroleum Exporting Countries and its allies (OPEC+) have been adding supply to the market at just 400,000 barrels a day.

This, it said, has been more than offset by the damage caused by Hurricane Ida in the Gulf of Mexico, which forced producers to shut in wells and take an estimated 2 million barrels a day of refining capacity from the market.

“The recovery in global demand from the delta impact [is] even faster than our ‘above consensus’ forecast, and global supply [remains] short of our ‘below consensus’ forecasts,” wrote senior commodity strategist at Goldman Sachs, Damien Courvalin.

The supply crunch is illustrated by the current 4.5 million barrels per day in observable inventory drawdowns, which Goldman Sachs noted as the largest on record, and follows a prolonged deficit which started in June last year.

“This deficit will not be reversed in coming months… as its scale will overwhelm both the willingness and ability for OPEC+ to ramp up,” Mr Courvalin said.

This sets the stage for inventories to fall to their lowest level since 2013 by the end of this year, after adjusting for pipeline fill, Goldman Sachs projected.

At the same time, low COVID-19 hospitalisation rates are being recorded globally as the vaccine rollout accelerates, leading to countries reopening borders and reviving transport demand. This coincides with a global gas shortage which is expected to increase oil fired power generation.

Goldman Sachs warned, however, that there will likely be a time to be “tactically bearish” oil in 2022, particularly if a US-Iran deal is reached. Analysts’ base case for such an agreement is April, leading to an $US80 a barrel price forecast from the second quarter of 2022 to the fourth quarter.

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