Oil heads for seventh weekly gain amid tight supply and dwindling stocks

Brent crude has risen about 17% since the beginning of the year as geopolitical tension rattles energy markets

Oil storage tanks in Cushing, Oklahoma. Crude prices are edging towards $100 a barrel as stock levels decline amid a tight market. Reuters

Oil prices are set for a seventh consecutive weekly gain, extending their advance on Friday amid dwindling stocks, geopolitical tension and a cold spell in the US that is threatening to disrupt energy supplies in a tight market.

Brent, the benchmark for two thirds of the world's oil, closed at $93.27 a barrel on Friday while West Texas Intermediate, the gauge that tracks US crude, closed at $92.31 a barrel.

WTI is set to lock in a weekly gain of more than 4 per cent. Brent has climbed about 17 per cent since the beginning of the year and is trading above its seven-year high of $91.70 a barrel, which was achieved last week. Crude has risen more than 67 per cent over the past year.

“WTI crude surged over the $90 level after an arctic blast made its way to Texas and disrupted some oil production in the Permian Basin,” said Edward Moya, senior market analyst at Oanda.

“The oil market is too tight and vulnerable to any shock.”

Even as thousands of flights are cancelled, the energy market is “fixated over production and not so much on short-term demand shocks”, Mr Moya said.

"Crude prices seem to have a one-way ticket to $100 oil. This week’s rally in crude was supported by the Opec+ decision to stick to their gradual increase strategy and as US production fell again," he said.

Energy traders are realising that the surge in Omicron infections did not lead to a major hiccup for the economy, he added. "Everything seems to be turning very bullish for WTI crude and the bullish momentum might not see much resistance until the $95 level."

Rising oil prices that are stoking concerns of inflation are also probably ringing “alarm bells” among emerging market oil importers, particularly poorer ones that are exposed to high food prices, said Hasnain Malik, head of equity research at Tellimer Research.

Crude has stayed buoyant in the past few weeks amid rising geopolitical tension in Eastern Europe. On Wednesday, the US approved the stationing of 3,000 troops in Eastern Europe, in addition to the 8,500 troops it placed on high alert after Russia sent thousands of military personnel to the border with Ukraine.

Russia, one of the world’s top oil producers, further boosted its troop presence at the weekend in a sign of a potential escalation that could derail the flow of global energy supplies.

Dwindling crude stocks in the US have also boosted oil prices. Inventories in the world’s biggest economy declined by a million barrels for week ending January 28, from the previous week, according to the data from the US Energy Information Administration.

On Wednesday, Opec and its allies announced that they will raise crude supply to 400,000 barrels per day in March, citing higher demand as the global economy continues to recover from the pandemic.

The group has stayed on course over the past few months in pledging to bring more barrels to the market. However, its ability to meet its higher output targets has come under scrutiny.

WTI crude surged over the $90 level after an arctic blast made its way to Texas and disrupted some oil production in the Permian Basin

Edward Moya,
senior market analyst at Oanda

The capacity of some Opec member countries to quickly increase production is shrinking, a report from Bank of America found.

Total investment in the upstream sector of the oil and gas sector fell 23 per cent below pre-coronavirus levels to $341 billion in 2021 amid green transition efforts, the International Energy Forum said in a report last year.

“It seems like $100 [per barrel] oil is not too far in the distant future and that will continue to be followed by growing pressure from world leaders for Opec+ to deliver more output,” Mr Moya said.

While the oil market should be able to meet demand in the near-term, the significant decline in spending and the “lack of willingness of some producers to invest does leave the oil market in a vulnerable state in the longer-term”, Japanese lender MUFG said in a note on Friday.

“The sheer dizziness of the oil price strength since the turn of the year is leading us to fast forward our long structural supply-side thesis,” said Ehsan Khoman, head of emerging markets research at the bank.

The Tokyo-based lender expects crude prices to rise to $105 a barrel in the fourth quarter of this year and advance to $115 a barrel in the first quarter of 2023.

It expects prices to peak at about $120 a barrel in the second quarter of next year, averaging $95.5 a barrel this year and $111.9 a barrel next year.