US Crude Updates 7-Year High on EIA Data

Oil prices updated the YTD highs on Thursday, with Brent futures breaking above $86, following the unexpected decline in US crude stockpiles and amid tight supply and a global energy crunch. Investors are worried that if the winter season is colder than usual, prices may continue to expand. Both WTI and Brent eventually have corrected, with WTI losing 0.50% and Brent declining by almost 1% at the time of writing, although larger timeframes still point to a strong uptrend even though prices have been in the overbought zone for a while.

Currently, WTI futures are trading at $82.97, after updating the highest in seven years when it hit $83.94 earlier today. Elsewhere, Brent futures are fluctuating near $85.00, after surging to the highest level in three years.

WTI has surged over 70% so far this year, and the UK brand has added over 64%. Crude prices have gained over 13% since last week.

US Crude Inventories Surprisingly Decline, EIA Data Shows

The uptrend started to get even steeper on Wednesday after the US Energy Information Administration (EIA) data showed that crude stockpiles dropped by 431,000 barrels in the week ending October 15, while most analysts expected on average a build of 1.857 million barrels. This was the first time in a month when the EIA reported negative inventory figures after three previous weeks of builds that added 13 million barrels on aggregate.

Besides crude, gasoline inventories also declined, falling by 5.368 million barrels, while analysts expected a draw of 1.267 million barrels. Stockpiles of distillates, including diesel and heating oil, tumbled almost 4 million barrels against expectations of a draw of 700,000 barrels.

At 426.5 million barrels, US inventories have broken below the five-year average for this time in 2021.

Phil Flynn, a senior energy analyst at Price Futures Group, told Reuters:

Stronger demand and concerns about a drop in inventories when refiners were already running a low rate during maintenance season is making people concerned about what will happen when refiners have to ramp up production to meet what is very strong demand for gasoline and distillate.”

Lower oil imports might have added to the narrowing crude balance sheet, as the US shipped in about 170,000 barrels per day less than the previous week ending October 8, which means 1.2 million barrels lower on aggregate.

The EIA report follows data from the American Petroleum Institute (API) released on Tuesday. The API report showed that US crude stockpiles had increased more than expected last week. Specifically, inventories rose 3.3 million barrels for the week ended October 15, compared with a build of 5.2 million barrels reported by the API in the previous week. Analysts anticipated a build of about 2.2 million barrels.

The API data also showed that gasoline inventories declined by about 3.5 million last week, and distillate stocks fell by about 3.0 million barrels.

Why Have Oil Prices Surged in 2021?

In a nutshell, the global economy has been recovering too fast amid vaccination programs and easing restrictions, especially in Western countries. This has caused a massive increase in demand for oil, while supply has been tightening because of various reasons. However, there are more nuances to this story.

At the beginning of the month, the Organization of Petroleum Exporting Countries (OPEC) and its allies decided to stick to a previous agreement to increase production only by 400,000 barrels per day in November, even though the global supply has been disrupted in the US Gulf of Mexico. Before the meeting, some economists expected that the group would choose to boost production to meet rising demand.

Meanwhile, the US Department of Energy said earlier this month that it had no plans to tap the Strategic Petroleum Reserve in an effort to ease surging prices. The agency said:

DOE continues to monitor global energy market supply and will work with our agency partners to determine if and when actions are needed. All tools in the tool box are always under consideration to protect the American people, there is no immediate plan to take those actions at this time.”

On top of that, oil prices have been driven by surging natural gas and coal prices worldwide, as economists expect that power generators may switch to oil to provide electricity. The price of natural gas has surged by almost 150% from the beginning of the year to its peak at about $6.5 on October 6.

Saudi Arabia’s minister of energy estimated that users switching from gas to oil might push demand higher by 500,000-600,000 barrels per day, depending on the weather during the cold season and prices of other sources of energy.

Even worse, OPEC not only declined to boost production above its initial targets but it has failed to keep inventories in line with the agreed figures. Recently, Bloomberg cited people familiar with the matter who said that OPEC had produced an average of about 750,000 barrels a day below the ceiling under a deal with Russia and others last month. The source explained that part of the problem was under-investment in Nigeria and Angola.

Separately, Kuwait, the fourth-biggest producer in OPEC, said that its output capacity had also declined by an average of 227,000 barrels a day to 2.579 million barrels a day this year.

It happens that global crude inventories are at their lowest in three years. In the meantime, major oil importers like Japan and India are worried that surging pricing would damage their economic recovery.

What’s Next for Oil?

Crude needs a major correction in the coming days given that prices have been maintaining within the overbought zone for a while, with the Relative Strength Index (RSI) hovering above 70 for most of October on the daily chart.

The correction may have already started, as the recent decline in the prices of natural gas and coal, which tumbled in China by 11% on Thursday on the news that Beijing is ready to intervene, may reduce bullish support for crude prices.

Jeffrey Halley, an analyst at brokerage OANDA, told Reuters:

With coal and gas prices easing and with the relative strength index technical indicators still in overbought territory, the odds of a sharp, but material fall in oil prices are rising.”

While oil prices have been surging this year overall, previous corrections have been considerable, especially in August.

https://www.bloomberg.com/news/articles/2021-10-07/oil-heading-for-seventh-weekly-gain-on-global-energy-squeeze

Despite everything, the longer-term price targets suggest that prices will continue to move higher.

Louise Dickson, a senior oil markets analyst at Rystad Energy, told Reuters:

This market tightness is expected to extend into most of 2022, and crude oil supply will only catch up with crude demand by the fourth quarter of next year.”

RBC analyst Michael Tran said in a note to investors:

We maintain the view that we have held all year, that the oil market remains in the early days of a multi-year, structurally strong cycle.”

Analysts at Goldman Sachs have similar expectations. They said last week that Brent futures could average $85 for the next few years. Basically, we’re experiencing a substantial repricing process rather than a temporary shock like it could be for natural gas.

Many traders expect crude to continue to extend its rally. The most widely held option suggests that crude will break above $100 a barrel by the end of the year. Options trades with strike prices as high as $200 by the end of 2022 have also been made lately.

Earlier this week, Iraq’s Oil Minister Ihsan Abdul Jabbar Ismaael said that oil prices could touch $100 a barrel during the first half of 2022 amid low global inventories.

USD/CAD Declines to 3-Month Low

The main currency pair that is directly influenced by oil price fluctuations is USD/CAD, which is one of the so-called commodity pairs along with the AUD and NZD.

Given the surge in crude prices, the USD/CAD pair has declined to the lowest in three months, even though the greenback had a great month in September.

The USD Index, which tracks the dollar against six other currencies, recently rose to the highest in a year, but that didn’t help USD in pair with the CAD. Here is the performance of USD/CAD compared to the USD Index:

Meanwhile, the Loonie has benefited from higher-than-expected inflation figures released on Wednesday, which will force the Bank of Canada to reduce its bond-buying program, just like the Fed.

Statistics Canada said that the consumer price index (CPI) rose by 4.4% last month year-on-year, which is the highest since February 2003. The increase in inflation accelerated from the 4.1% growth in August. Analysts expected the reading at 4.3% for September.

Energy prices have been the main drivers, as consumers paid over 32% more in September for gasoline.

If oil prices continue to expand, the Canadian dollar will intensify its pressure on the greenback. 

 

 

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