Oil extends gains on supply disruption fears

Singapore — Oil prices climbed on Friday, extending sharp gains in the previous session as frigid weather swept across large swathes of the US, threatening to further disrupt oil supplies.

Brent crude rose 34cc, or 0.4%, to $91.45 a barrel by 2.06am GMT, after rising $1.16 on Thursday.

US West Texas Intermediate crude rose 46c, or 0.5%, to $90.73 a barrel, having gained $2.01c the previous day to settle above $90 for the first time since October 6 2014.

Both benchmarks are headed for their seventh straight weekly gain.

“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.

A huge winter storm swept across the central and Northeast US on Thursday where it was delivering heavy snow and ice, making travel treacherous if not impossible, knocking out power to thousands and closing schools in several states.

Tight oil supplies pushed the six-month market structure for WTI into steep backwardation of $8.08 a barrel on Friday, 7c shy of an eight-year high of $8.15 on November 29. Backwardation occurs when prices for prompt spot trade are at a premium to future prices, and usually encourages traders to take oil out of storage.

As recovering demand is outpacing supply, oil markets are increasingly vulnerable to supply shocks, analysts said.

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

Geopolitical tensions in Eastern Europe and the Middle East have also fuelled oil’s sharp gains which have pushed Brent futures up by 17% and WTI by 20% so far this year.

The US warned that Russia was planning to use a staged attack as justification for invading Ukraine. Russia President Vladimir Putin has blamed Nato and the West for increased tensions, even as he has moved thousands of troops near to Ukraine’s border.

“With geopolitical risk in Ukraine and only gradual increase of production by Opec+, prices are expected to head towards $100 a barrel,” Chiyoki Chen, chief analyst at Sunward Trading said.

Opec and allies led by Russia, known as Opec+, agreed earlier this week to stick to moderate rises of 400,000 barrels per day (bpd) in oil output with the group already struggling to meet existing targets and despite pressure from top consumers to raise production more quickly.

Over the medium term, however, some analysts expect the oil market to flip into surplus as soon as next quarter, helping put the brakes on the recent surge in prices.

“We expect the sequential trend of quarterly global stock draws will flip to inventory builds as soon as 2Q 2022, and sustain for the next 15-18 months,” analysts at Citi Research said in a note late on Thursday.

“Our view is for a tight crude oil market to shift to surplus outright and in terms of days of demand cover.

Reuters