Oil rallied above $86 a barrel after Saudi Arabia said that the OPEC+ alliance should maintain its cautious approach to managing global crude supplies given the threat to demand still posed by the pandemic.
Global benchmark Brent advanced 0.8%, building on a run of seven consecutive weekly gains, while West Texas Intermediate hit the highest since 2014. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman told Bloomberg Television at the weekend that producers shouldn’t take the rise in prices for granted. That conservative stance was echoed by both Nigeria and Azerbaijan.
Oil has more than doubled over the past 12 months, fanning inflationary concerns, as the global economy rebounded from the dislocation caused by the coronavirus pandemic. While consumption has surged, the Organization of Petroleum Exporting Countries and its allies have been restrained in easing the draconian supply cuts imposed in 2020 to salvage prices. That’s driven Brent to the highest since 2018 as stockpiles fall and key timespreads balloon.
“Saudi comments reinforce the view that OPEC+ will stick to its cautious approach, and with demand looking better, this does mean that the market will continue to tighten for the remainder of the year,” said Warren Patterson, head of commodities strategy at ING Groep NV in Singapore. “So further tightening certainly does leave the potential for further volatility.”
The gains in crude have been supported by a powerful rally in natural gas, which has boosted demand for oil products as a substitute. While Prince Abdulaziz said that consumption may increase 500 000-600 000 barrels a day if the Northern Hemisphere’s winter is colder than normal and companies switch from gas to crude, he also cautioned that more barrels from OPEC+ would do little to curb costs of gas in Europe and Asia or gasoline in the US.
Oil bull Goldman Sachs Group Inc. weighed in with another positive outlook, saying gas-to-oil switching may add 1 million barrels a day to global demand. “Importantly, we expect demand to remain near pre-Covid levels this winter even under average winter temperatures,” the bank said in an October 24 note.
Still, in a sign the pandemic remains a challenge, China has been dealing with a renewed Covid-19 outbreak caused by the delta variant from overseas. A wave of infections has spread to 11 provinces in the week from October 17, Mi Feng, spokesman for the National Health Commission, told a briefing.
At present, OPEC+ is raising daily production by 400 000 barrels each month, and has resisted pressure to do more. Tightness has been exacerbated by some members failing to reach their quotas. The cartel next meets on November 4.
With stockpiles falling, the market is firmly backwardated, a bullish pattern marked by near-term prices trading above those further out. The gap between WTI’s contract for this December and the same month in 2022, has swollen to about $12 a barrel. The difference between the nearest two contracts, known as the prompt spread, surged to $1.38 a barrel from 75 cents a week ago.
“WTI is also dragging Brent higher,” Patterson said. “There are clear concerns over Cushing inventory levels, which is well reflected in the WTI prompt spread.”
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