Oil prices rise on tight supply, hit three-month high

Oil prices extended gains Thursday, riding higher on growing fuel demand and crossing $76 for the first time since July this year.

The rally was fuelled by huge United States crude inventories drawdown as well as production challenges in the Gulf of Mexico.

Precisely, Brent crude, Nigeria’s oil benchmark, rose nine cents, or 0.1 per cent, to $76.28 a barrel, while West Texas Intermediate (WTI) crude was up four cents, or 0.1 per cent, to $72.27 a barrel, after data from the U.S. Energy Information Administration (EIA) showed the country’s crude stocks till September 17 fell by 3.5 million barrels to 414 million, the lowest total since October 2018.

Several OPEC+ countries, including Nigeria, Angola and Kazakhstan have struggled in recent months to raise output due to years of under-investment or maintenance work delayed by the pandemic.

However, there have been assurances by the Minister of State, Petroleum Resources, Chief Timipre Sylva as well as the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, that the technical challenges were being fixed.

Both Nigerian oil industry leaders further noted that by the end of October or mid-November, the country would be able to meet its monthly allocation by the Organisation of Petroleum Exporting Countries (OPEC) and the country has written the cartel for a higher baseline.

Kyari recently said that as a resource-dependent nation, Nigeria was most comfortable with a price band between $50 to $60 per barrel.

In a sign of strong fuel demand as travel bans ease, East Coast refinery utilisation rates in the United States rose to 93 per cent, the highest since May 2019, the EIA data showed. However, before declining, Brent crude had hit $76.50 a barrel, the highest since mid-July on last week’s massive crude stock draws worldwide, particularly of floating storage.

On its part, Goldman Sachs has predicted that Brent could reach $90 per barrel if the weather in the northern hemisphere turns out to be colder than normal this winter, which is $10 per barrel more than its current forecast.

The call for higher oil prices would come on top of the already too-high natural gas prices, which have sunk some natural gas power providers in Europe as industry leaders, including the NNPC, insist that the natural gas situation will have a spill-over effect on the oil market.

The projection is that with natural gas in short supply, there would be more focus on crude oil as one of the only viable alternatives since wind and solar power are proving insufficient at this time.

According to Goldman, a colder winter in Europe and Asia would have a profound effect on natural gas and oil demand, earlier this week, predicting that a colder winter could lead to 900,000 bpd in additional oil demand.

Meanwhile, global commodity trading firm, Trafigura is maintaining its forecast for oil prices to potentially hit $100 per barrel late next year, despite the risk of short-term Covid-19 headwinds heading into the northern hemisphere winter.

Trafigura predicted earlier this year that crude prices were likely to return to $100, something the company said could happen “probably towards the back end of next year if conditions are right”.

“The recovering oil market poses a new kind of challenge for discipline in the OPEC+ group of producers, as, “Those who want to produce more, can’t, and those who can, don’t want to,” according to Trafigura.”

Signs of a tightening market were the result of an ongoing recovery in demand and the risk that high gas prices could have a knock-on effect on oil markets due to switching to fuels other than natural gas.

OPEC members and allies known as OPEC+ are expected to meet in early October to decide whether to allow more production or continue with its current 400,000 bpd addition which it earlier agreed upon in July.