Oil rises further as energy supply crunch continues to eat up global tight supply
The global energy supply crunch continues to show its teeth, as oil prices extend their upward march this week, a result of traders pricing in the ongoing rise in fuel demand – which amid limited supply response is depleting global stockpiles.
The relative calamity of Covid-19 and return to normalized mobility amid an energy crunch are bullish factors that have amplified to the extreme.
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In the short-term, the upside risk to crude is real and a brief spike to $100 is not out of the question as oil becomes a viable substitute for heating and power, particularly in Asia.
However, there is inherent downside risk if oil prices stay too high for too long, and the negative lag effect on oil demand - either from GDP destruction or price elasticity - is an underappreciated risk looking a few months out.
November and December will still be incredibly tight as the energy crunch holds and as OPEC+ stays on the sidelines.
Crude balances appear bullish through January 2022 as improved margins support incremental runs amid price-lifting near-term dynamics for products demand.
Nevertheless, liquids balances indicate a softer market from March 2022 onwards and higher price signals encourage more marginal supply on the market.
In the very short-term, there are a few events that could potentially tip the scale and chip a bit of value from oil indexes.
Oil demand could be curbed by Russia going back into lockdown, or by other countries with low vaccination rates taking a similar path towards re-lockdown.
Another downside risk comes from the US, where a mandate for TSA workers to get vaccinated could potentially upend aviation traffic.
On the bullish hand, there is no short-term supply ace up the sleeve, unless it comes from OPEC+ tapping into its multi-million-bpd spare capacity, which seems unlikely at the moment as both alliance heavyweights Saudi Arabia and Russia have vocalized support for a continuation of the cautious supply approach.
Prices may need to go higher before inevitably going lower in 2022 amid a looming oversupply which will prompt OPEC+ to eventually adjust down its supply plan.
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