Oil prices climb as COVID recovery, power generators stoke demand

OPEC+ once again fails to pump enough to meet its output target

Oil prices hit multi-year highs on Monday buoyed by recovering demand and high natural gas and coal prices encouraging users to switch to fuel oil and diesel for power generation.

Brent crude oil futures were up 81 cents, or 1%, to $85.67 a barrel by 1220 GMT, after hitting $86.04, their highest level since October 2018.

U.S. West Texas Intermediate (WTI) crude futures climbed $1.23, or 1.5%, to $83.51 a barrel, after hitting $83.73, their highest since October 2014.

Both contracts rose by at least 3% last week.

“Easing restrictions around the world are likely to help the recovery in fuel consumption,” analysts at ANZ bank said in a note, adding that gas-to-oil switching for power generation alone could boost demand by as much as 450,000 barrels per day in the fourth quarter.

Cold temperatures in the northern hemisphere are also expected to worsen an oil supply deficit, said Edward Moya, senior analyst at OANDA.

“The oil market deficit seems poised to get worse as the energy crunch will intensify as the weather in the north has already started to get colder,” he said.

“As coal, electricity, and natural gas shortages lead to additional demand for crude, it appears that won’t be accompanied by significantly extra barrels from OPEC+ or the U.S.,” he said.

Prime Minister Fumio Kishida said on Monday that Japan would urge oil producers to increase output and take steps to cushion the impact of surging energy costs on industry.

Chinese data showed third-quarter economic growth fell to its lowest level in a year hurt by power shortages, supply bottlenecks and sporadic COVID-19 outbreaks.

China’s daily crude processing rate in September also fell its lowest level since May 2020 as a feedstock shortage and environmental inspections crippled operations at refineries, while independent refiners faced tightening crude import quotas.

“Demand is outstripping supply heading into the winter months, and this should safeguard upward pressure on oil prices,” said Stephen Brennock at broker PVM.

“The $80 a barrel level continues to offer plenty of support and a revisit above $85 could trigger an acceleration towards $90. Yet this is by no means a foregone conclusion.”

Reuters

OPEC+ once again fails to pump enough to meet its output target

OPEC and its allies once again failed to pump enough oil to meet their output targets, exacerbating the supply deficit as the world recovers from the coronavirus pandemic.

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OPEC+ cut its production 15% deeper than planned in September, compared with 16% in August and 9% in July, according to delegates with knowledge of the matter.

This reflects the inability of some members — including Angola, Nigeria and Azerbaijan — to raise output to agreed volumes due to a lack of investment, exploration and other issues. In theory, OPEC+ could have pumped an extra 747,000 barrels a day in September and remained within its agreed production limit.

The Organization of Petroleum Exporting Countries and its allies, which include Russia, have been under pressure from major consumers to accelerate the pace of their supply increases. These calls have become louder as the energy crisis has engulfed Europe, sending power prices to record levels.

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Brent has rallied to the highest level since October 2014 as some power producers switch to oil, in tandem with the global recovery. Asian demand for U.S. crude is also rising as the energy crisis boosts prices for other grades priced against global benchmark Brent.

The latest pressure came from Japanese Prime Minister Fumio Kishida who urged producers on Monday to ramp up output in the face of the recent price rise. He added that his government is watching price trends in the market to assess its impact on domestic industries.

If prices do not turn around, the next OPEC+ meeting on Nov. 4 could take place with heightened political pressure from consumers.

The meeting will also coincide with COP26 climate talks in Glasgow. With world leaders meeting to extract more ambitious promises from governments and global business to avoid a climate catastrophe, attention on the producer-group will be even higher.

Bloomberg