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Oil prices scale $85/bbl on back of supply deficit

Oil prices jumped to a three-year high above $85 a barrel on Friday, on forecasts of a supply deficit over the next few months, spurred by rising demand due to the easing of travel restrictions.

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Demand has picked up with the recovery from the COVID-19 pandemic, with a further boost from power generators who have been turning away from expensive gas and coal to fuel oil and diesel.

The White House said it will lift COVID-19 travel restrictions for fully vaccinated foreign nationals effective Nov. 8, which should boost jet fuel demand. read more

Meanwhile, a sharp drop in OECD and U.S. oil stockpiles is expected to keep global supply tight.

"It will take a trifecta of events to derail this oil price rally: OPEC+ unexpectedly boosts output, warm weather hits the northern hemisphere, and if the Biden administration taps the strategic petroleum reserves," said Edward Moya, senior market analyst at OANDA.

The International Energy Agency on Thursday said the energy crunch is expected to boost oil demand by 500,000 barrels per day (bpd).

That would result in a supply gap of around 700,000 bpd through the end of this year, until the Organization of the Petroleum Countries and allies, together called OPEC+, add more supply, as planned in January.
Oil and natural gas prices have soared to multi-year highs recently, sending power prices surging to record levels as widespread energy shortages hit Asia and Europe.

"Record coal and gas prices as well as rolling blackouts are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming," the IEA said in its monthly oil report.

As a result, global oil demand next year is now projected to recover to pre-pandemic levels, the Paris-based agency said.

It made upward revisions to its demand forecasts for this year by 170,000 bpd, or a total addition of 5.5 million for the year, and by 210,000 bpd in 2022, or a total addition of 3.3 million.

An upsurge in demand in the past quarter led to the biggest draw on oil products stocks in eight years, it said, while storage levels in OECD countries were at their lowest since early 2015.

"Provisional August data already indicates that there is some unseasonably high demand for fuel oil, crude and middle distillates for power plants across a number of countries, including China, Japan and Pakistan in Asia, Germany and France in Europe and Brazil," the IEA said.