Brent Cracks Above $80 on Bullish Supply-Demand Outlook

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

WASHINGTON (DTN) -- Extending gains into a sixth consecutive session, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in early trade Tuesday on growing signals that global oil demand will run ahead of production growth in the fourth quarter, with a recent surge in gas prices amid depleted inventories in the European Union, Russia, and China have further stoked concerns over an impending global energy crunch this winter.

International crude benchmark Brent contract for November delivery broke through $80 per barrel (bbl) on the spot continuous charts this morning for the first time since October 2018 as futures traders upped their bets that the record run in gas prices in European Union and Asia would lead to excess demand for oil powered electricity generation this winter. Dutch TTF (Title Transfer Facility) and UK NBP (National Balancing Point) natural gas prices hit all-time settlement highs on Monday -- having rallied 11% on the session, with gains extending into early trade Tuesday. The Dutch contract traded at 85 per megawatt euro, up from 20 per megawatt euro as recently as April.

The natural gas crisis in Europe is set to intensify as winter heating season approaches, with supplies insufficient to keep up with current demand, let alone build stockpiles for what will be increased demand during the winter months.

"If it's a cold winter in Europe or Asia, we have a big problem," said Ben Lucklock, co-head of the world's second largest oil trading house Trafigura. "If it's cold, and on top, it isn't windy, then we have a much bigger problem. We will face shortages. I struggle to see anything but higher prices."

Russia's Gazprom -- the EU's largest gas supplier, has been steadily reducing gas flows through the Ukrainian transit corridor and Yamal-Europe pipeline this summer amid depleted inventories domestically and maintenance issues at several gas fields. Analysts believe that Gazprom would not be able to increase gas supplies into Europe until at least Nov. 1, spelling higher gas prices for EU customers in the short term.

Adding to EU energy crisis, panic-buying at petroleum stations in the United Kingdom over the weekend have reportedly left about 90% of the country's gas stations dry, prompting the government there to consider using the army for fuel deliveries.

Meanwhile, Organization of the Petroleum Exporting Countries and allies known as OPEC+ still have a cap on oil production, while a lack of investment and delayed maintenance has limited output from the group's several producers. Nigeria, Kazakhstan, and Angola have reportedly missed their production target last month by at least 250,000 barrels per day (bpd), underdelivering on promised output increases. Analysts at Goldman Sachs said in a note released Monday that current supply-demand deficit "will not be reversed in coming months, as its scale will overwhelm both the willingness and ability for OPEC+ to ramp up production."

Tuesday's move higher came even as U.S. dollar index surged 0.30% against a basket of foreign currencies in overnight index trade to 93.680 after stronger-than-expected U.S. industrial data showed durable goods orders unexpectedly increased 1.8% in August led by strong demand for transportation equipment. Manufacturing data in recent weeks showed demand for durable goods remained resilient this summer even as manufacturers continue to grapple with shortages in parts and labor. On Tuesday, U.S. Federal Reserve Chairman Jerome Powell along with Treasury Secretary Janet Yellen will testify before the Senate Banking Committee, likely telling lawmakers that inflation pressures and hiring challenges in the world's biggest economy may be "more enduring than anticipated."

In prepared remarks for his appearance, Powell said the central bank would "certainly respond and use our tools to ensure that inflation runs at levels that are consistent with our goal" if inflationary pressures were to persist.

In early trade, NYMEX November West Texas Intermediate futures jumped above $76 bbl to a $76.67 high, trading near $76.25 at last look, up $0.80. ICE November Brent added $0.57 from a fresh 35-month high settlement on the spot continuous chart to $80.10 bbl after trading at $80.75. NYMEX October ULSD futures gained 2.27 cents to trade near fresh 35-month spot high at $2.3187 gallon, and front-month RBOB futures traded up 0.87 near $2.2325 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Brian Milne