Oil holds above US$80 with global power shortage boosting demand

SINGAPORE (BLOOMBERG)- Oil held above US$80 a barrel on expectations that a power crisis from Asia to Europe will lift demand and tighten global balances. West Texas Intermediate futures edged higher in Asian trading after closing up 1.5 per cent on Monday (Oct 11).

Oil markets are tightening rapidly in the run-up to the Northern Hemisphere winter as shortages of natural gas and coal boost demand for alternative power generation fuels such as diesel and fuel oil. The Opec+ alliance’s caution in restoring supply is adding to the upward price pressure.

The switching is changing the US crude benchmark’s market structure, pushing it deeper into backwardation, a bullish pattern that indicates a dearth of supply. It’s also prompting an upgrade of price forecasts, with Citigroup raising its fourth-quarter Brent forecast to US$85 a barrel and saying it could spike to US$90 at times on factors including gas-to-oil substitution this winter.

Opec+ will likely struggle to meet demand growth for the rest of the year, according to Mr Vivek Dhar, an analyst at Commonwealth Bank of Australia. “If oil prices keep heading toward the US$90 a barrel mark, there’s a possibility that Opec could start to turn up the tap a little bit more and try to cool the market,” said Mr Wayne Gordon, a strategist at UBS AG Wealth Management.

“In some ways, oil is the passenger here in terms of coal and gas prices,” so a lot will depend on how cold the winter is, he said.

If the rally continues it could also prompt supply and political responses from the US. Privately held refiners are ramping up drilling in the Permian Basin, while the White House may put more pressure on Opec to pump more.

“Joe Biden knows that high gasoline prices are not good for incumbents,” according to Mr Daniel Yergin, oil historian and vice chairman of IHS Markit. “We’ll certainly be hearing more from the administration.”

Oil refiners, meanwhile, are enjoying a much-needed boost in profitability due to the energy crises. Complex refining margins in Singapore, a proxy for the Asian region, have risen to the highest in two years, while those for diesel are near a 21-month high.

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