Is Brent crude oil heading toward US$80 a barrel?
If the market signals and the pundits are to be trusted, the bull run is on.
Oil prices headed to a third straight week of gains on Friday. Brent futures rose 84 cents, or 1.1 per cent, to settle at US$78.09 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 68 cents, or 0.9 per cent, to settle at US$73.98, Reuters reported. That was the highest close for Brent since October 2018 and the highest for WTI since July 2021.
An unexpected problem in Canada’s oil sands and a bigger-than-expected draw in U.S. crude oil supplies are contributing to the market woes. Bloomberg, citing an unnamed source, reported that Syncrude, majority-owned by Suncor, had to cut its bitumen production for September due to mechanical disruption. Syncrude produces some 275,000 barrels per day (bpd) of crude oil from bitumen at its upgrader in Alberta, according to the latest available data from January to May.
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In the meantime, U.S. crude oil supply data showed a bigger-than-expected draw, indicating growing demand. A U.S. Energy Information Administration (EIA) report released on Wednesday showed a draw of 3.481 million barrels from the reserves for the week ending Sept. 17, while a 6.422-million-barrel draw was cited the week before.
The lower than usual output from Canada and greater than anticipated withdrawals in the U.S. contributed to the price rally.
Much of U.S. Gulf of Mexico production was reportedly offline in the immediate aftermath of Hurricane Ida. The storm was estimated to have disrupted more than 95 per cent of U.S. oil output in the region. Even until this weekend production of nearly 300,000 barrels of oil production a day was reportedly still offline. This is impacting the markets.
In view of the market crunch, major stakeholders are beginning to review their price projections for the remainder of this year and next.
Crude oil prices could rise to US$80 per barrel by the end of this year and even top that mark, energy and commodities trader Vitol Group’s chief executive Russell Hardy told Bloomberg. According to Hardy, the ongoing gasoline supply crunch will spur demand for alternatives, lifting crude oil demand by half a million barrels daily in the fourth quarter.
Oil trading giant Trafigura is projecting further tightening of the oil markets in 2022. Trafigura says oil will continue rising next year, and Brent could hit US$100 by the end of 2022.
“Not just the price, but the level of backwardation we are seeing, is telling us the market is hungry for oil,” Saad Rahim, the chief economist of Trafigura, was quoted as saying during the virtual Argus Asia-Pacific Crude and Products Forum on Thursday. Worldwide oil demand has recovered enough from the COVID-19 impact to put the oil market in a “much healthier place,” Rahim said. [Ed. note: Backwardation occurs when the current price of an underlying asset is higher than prices trading in the futures market]
We could see US$100 oil by the end of next year, “if conditions are right,” Rahim said.
Investment bank Goldman Sachs agrees, saying Brent could reach US$90 per barrel if this winter turns out to be cold rather than mild. That could lead to 900,000 bpd in additional crude demand, Goldman Sachs head of commodities Jeffrey Currie told Irina Slav of OilPrice.com.
That’s US$10 per barrel more than Goldman Sachs’ current forecast. The natural gas situation in Europe is tight and the energy demand during winter could only be filled with available crude, Goldman Sachs believes. This will have a spillover effect on the oil markets.
Yet, there’s one caveat in the entire argument. No one seems to be considering the work-from-home trend and the accompanying change in driving habits. This may impact consumption patterns permanently.
For the time being, not many people seem concerned. Does that mean there will be no changes in driving habits and that it will be life as usual post-COVID?
Despite projections to the contrary, that question will linger.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.
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