ICE Brent Tops $88

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended higher early Wednesday after International Energy Agency forecasted global oil demand would surpass pre-pandemic levels this year, supported by a robust recovery in jet fuel consumption and diminished impact from COVID-19 variants on economic activity, while escalating tensions along the Russian-Ukrainian border continue to support broader commodity markets.

Near 7:30 a.m. ET, West Texas Intermediate futures for February delivery advanced $0.89 to $86.54 per barrel (bbl), with the next-month March contract narrowing its discount to $85.86 bbl. International crude benchmark Brent March futures crested above $88 bbl, adding $0.94 in overnight trading. NYMEX February RBOB futures gained 1.96 cents to $2.4514 gallon, and the front-month ULSD contract surged 3.33 cents to $2.7073 gallon.

In its Oil Market Report for January released Wednesday morning, Paris-based IEA raised its demand forecast by 200,000 barrels per day (bpd) for 2022 while also increasing its estimate for 2021 consumption by 200,000 bpd, reflecting a "relatively subdued" impact from the spread of Omicron variant on mobility trends and economic growth across industrialized nations. Global oil demand is now seen to have risen 5.5 million bpd in 2021 and is expected to grow by 3.3 million bpd this year, the IEA said, surpassing pre-pandemic levels by more than 150,000 bpd at 99.7 million bpd. In fourth quarter of 2021, IEA said global oil demand "defied expectations" rising 1.1 million bpd to 99 million bpd, an upward revision of 345,000 bpd compared to its previous report.

"If demand continues to grow strongly or supply disappoints, the low level of stocks and shrinking spare capacity mean that oil markets could be in for another volatile year in 2022," IEA said.

Supporting this view, Goldman Sachs commodity research team estimate commercial crude oil inventories held by countries that are part of the Organization for Economic Cooperation and Development will fall this summer to their lowest level since 2000.

OPEC+ spare capacity will likely be critical in balancing global oil inventories. IEA estimates that the group's spare capacity will shrink to 2.6 million bpd in the second half of the year from around 5 million bpd currently should the producer group continue to unwind 2020 supply cuts and Iran remains under sanctions. IEA trimmed its forecast for non-OPEC oil supply by 100,000 bpd to 66.5 million bpd, reflecting constraints on Russian oil production growth.

According to Bank of America economists, Russia might have only 100,000 bpd available as additional production capacity versus January production levels.

OPEC+ once again missed its production quotas last month, according to the group's Monthly Oil Market Report, raising output by 166,000 bpd last month compared with 253,000 bpd allowed under an OPEC+ joint supply agreement. Nigeria along with smaller producers in Africa and Latin America once again missed their production targets last month amid political turmoil and chronic underinvestment. Crude oil output increased mainly in Angola, Saudi Arabia, Iraq, and the United Arab Emirates, while production in Libya and Nigeria declined. Libya suffered the largest month-on-month drop in crude oil production in December, down 119,000 bpd to 1.092 million bpd, plagued by port and field closures. The shutdowns accelerated further this month, pressing the nation's production down to around 600,000 bpd before eventually recovered to above 1 million bpd.

On the geopolitical front, a ramp-up in tensions along the Russian-Ukrainian border continue to support European natural gas prices that are having a spillover effect into broader commodity markets. On Tuesday, Moscow ordered its embassy staff in Kiev to begin an evacuation process -- a possible clue of further escalation in the ongoing conflict. Russia has amassed nearly 100,000 troops along the Ukrainian border and was carrying out military drills from Jan. 14, according to wire services. Ukraine is a major transit route for Russian gas into the European Union, with flows meeting around 14% of EU gas demand. Europe's gas storage has depleted to the lowest seasonal level in a decade at the start of the year despite a relatively mild winter so far. Ultra-high prices have given suppliers an incentive to reduce new gas purchases and instead run-down existing stocks in the expectation of refilling storage more cheaply after the winter season.

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

Liubov Georges