The oil markets opened higher this week and are heading for their largest January gain in at least thirty years, as strong demand outpaced new supply.
- Brent sees a 17% increase in January, the largest monthly gain since February 2021
- Prices rose by 17% in January.
The global crude oil benchmark increased 0.8% to paring earlier gains but is still on track for 17% growth this month. West Texas Intermediate futures traded above $17 a barrel.
Monday’s traders were met by familiar drivers, including weather and stockpiles. Low temperatures in the U.S. have been increasing fuel demand. Boston reported a daily record for snowfall and New York’s Central Park received more than 8 inches of snowfall. A rockslide damaged the oil infrastructure in Ecuador, potentially threatening supply. In the meantime, oil on tankers dropped by more than a fifth last Wednesday, which is the latest sign that inventories are eroding.
Combining booming demand, a weak supply, and shrinking stockpiles, crude oil prices have soared this month. Top banks and oil companies are predicting that prices will soon surpass $100 per barrel.
The Russian military presence near Ukraine has given Russia additional support, but it has been hampered by the inability of the Organization of Petroleum Exporting Countries (OPEC) and its allies to meet their planned increase in supply. Wednesday’s market assessment meeting will be held by the OPEC+ alliance.
Keshav Lohiya (founder of consultancy Oilytics) stated that markets opened strongly because of the cold weather in the U.S. “The oil rally has plenty of steam left, as geopolitical risks continue to heat up.”
Tensions also exist in the oil-rich Middle East. The United Arab Emirates intercepted the missile launched by Yemeni fighters while Israel’s president was visiting. This was the third attack on the financial hub of the Middle East in less than a month. The missile was destroyed by the UAE and no casualties were reported.
The oil product markets continue to boom as economies recover from the pandemic. Global refiners are reaping robust profits from the production of gasoline. The demand outlook is indicating that this trend will continue.
The global oil markets are experiencing backwardation. This bullish pattern means that near-term contracts have a premium over those farther out. At Friday’s close, the spread between Brent’s sixth and first-month futures contracts was at its strongest since 2013.
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