Demand outstripping supply drives oil price action

Commodities

Supply and demand is such a simple concept – but it’s one that continues to have the biggest influence on current oil prices.

Oil trading

Another strong opening for crude oil

At the start of the week, the WTI and Brent Crude benchmark were trading at strong levels. This has been the case for some time now, so it’s not surprising to see, but for oil bulls it will no doubt be encouraging.

WTI, for example, was trading for $85.59 at its highest on Monday. It has subsequently fallen back to $83.65 on Tuesday morning, but still an overall strong position for West Texas Intermediate.

Brent has been a little more subdued but is still in a good place. The North Sea benchmark reached an on-the-day high of $85.76 on Monday. As of Tuesday, Brent futures were trading for around $85.08.

What’s driving price action this week? It’s the same old story: supply and demand.

Demand appears to still be in front of demand.

For example, supplies at the Cushing, Oklahoma depot are at three-year lows, suggesting higher throughput and less stockpiling.

US commercial inventories decreased by 0.4m bpd according to the EIA stockpile report for the week ending October 15th. They are now 6% lower than the five-year average in total.

Gauging the crude oil demand outlook vs supplies

We’ve seen much agitating from the Biden White House to try and get OPEC and allies to bring more crude to market.

Saudi Arabia, the current OPEC+ head honcho, is steadfastly refusing to do so. The world’s top oil producer is comfortable with the output levels it and its allies have agreed: an extra 400,00 bpd each month from now until April 2022.

But demand keeps on rising. The current energy crunch and possible heating switch from gas to oil is driving up forecasts. It’s estimated the global daily average could rise anywhere between 500,000 to 750,000 bpd heading into winter.

This is the basic price supporter going forward. There has been much talk of oil prices recently. Can they reach over $100? It’s a big question. Some ultra-bullish options traders are going even further, pricing in $200 per barrel oil prices by the end of December 2021.

That seems a little excessive to this reporter but there’s no doubt that oil prices are in a strong position right now.

However, there is also COVID-19 to contend with. The pandemic is by no means over. Rising cases in key crude importers could put pay to further travel and demand recovery. If the world needs to enter a second lockdown, how will oil demand cope? If that were the case, then it’s likely prices would slump.

Where next for oil? No rally lasts forever. It’s an immutable law of physics that what goes up, must come down. But while that’s talking about gravity, the weight of supply/demand could bring oil back down to Earth. Essentially, price action is all pegged to COVID-19 cases as it has been for the past nearly two years.

For now, however, oil continues to build on high demand and restricted supplies.