Oil tops $80 per barrel to reach three-year high as supply tightens and demand rises

A surge in gas prices has also fuelled the crude rally into a sixth trading session on Tuesday

Goldman Sachs has raised its 2021 forecast for Brent crude to $90 per barrel from $80. Reuters

Oil prices continued to rise on Tuesday with Brent, the benchmark for more than half of the world’s crude, hitting a three-year high as demand eclipses supply and inventories are depleted.

Brent climbed 0.88 per cent to $80.23 per barrel, its highest since 2018, at 7.57am UAE time on Tuesday. The benchmark is up about 55 per cent since the start of the year. West Texas Intermediate, the gauge for US oil, rose 0.93 per cent to $76.15 a barrel, the highest since July.

The latest surge in the global crude market follows the continued economic recovery amid mass inoculation campaigns to stem the spread of the more virulent Covid-19 Delta strain. The opening up of economies and removal of Covid-related travel restrictions have boosted energy demand.

That prompted Goldman Sachs to raise its year-end forecast for Brent to $90 per barrel from $80 on Monday.

"The current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts," the US Investment Bank said.

A surge in natural gas prices is also supporting crude rally on expectations that spillover demand will benefit oil as users seek alternatives.

Natural gas prices have risen 5.84 per cent to $6.04 per metric million British thermal unit, the most since last month.

"Oil demand could pick up by an additional 0.5 million barrels per day, or 0.5 per cent of global oil supply, as high gas prices force a switch from gas to oil consumption," Reuters quoted Commonwealth Bank commodities analyst Vivek Dhar as saying.

Energy prices could still rally from here if the winter period in the Northern Hemisphere proved colder than expected, according to Commonwealth Bank.

“The likelihood of an impending energy crisis grows with each passing day, as countries race to secure gas supplies before winter months arrive,” Naeem Aslam, chief market analyst at Avatrade, said on Tuesday.

“However, there isn't enough gas to meet rising demand … while gas-producing countries such as Russia are unwilling to export and are storing it to meet their own domestic demand.”

The Opec+ group of producers, led by Saudi Arabia and Russia, is bringing back 2 million bpd to the markets by the end of the year. It is set to decide whether to bring an additional 400,000 bpd of supply in October.

However, producers are struggling to lift production to keep up with increasing global demand.

“Poor maintenance during coronavirus lockdowns and hindrances in the Gulf of Mexico are major drivers of the growing demand-supply gap,” Mr Aslam said on Monday.

“On the other hand, as economies recover from the coronavirus pandemic, demand for oil continues to rise."