Oil reaches multi-year peak of $86, then drops back

Although oil prices reached a three-year peak above $86 per barrel on Thursday, it was driven by tight supply as well as a global energy crunch. However, prices fell as investors took profits from signs that the rally is not sustainable.

A supply report by the U.S. Energy Information Administration, Wednesday, showed that crude and fuel inventories have tightened. Crude inventories at Cushing storage hub fell to a three year low, helping to drive the latest gain.

Brent crude oil rose to $86.10, its highest level since October 2018. However, by 0815 GMT, it was down 79cs or 0.9% to $85.03.

U.S. West Texas Intermediate crude oil fell 0.7% to $82.85, or 57 cents.

“We saw some correction but overall sentiment remained stable as there have not been large increases in output from the United States or OPEC,” stated Satoru Yoshida (a commodity analyst at Rakuten Securities).

Brent’s price has risen more than 60% this year. This is due to a slower ramp-up of supply by the Organization of the Petroleum Exporting Countries (OPEC) and its allies. There has also been a global coal crunch that has led to a shift to oil for power generation.

A drop in natural gas and coal prices also put pressure on oil. China’s coal prices fell 11% Thursday. This is an extension of losses this week after Beijing indicated it might intervene in order to cool the market.

Jeffrey Halley, analyst at OANDA, stated that “with coal and gas prices decreasing and the relative strength indicator technical indicators still in excess of bought territory,” the odds of an abrupt, but material fall, in oil prices are rising.”

Analysts are still calling for oil to rise further as OPEC+ will likely stick to its plan of gradual output increases, while demand is expected to reach pre-pandemic levels.

Giovanni Staunovo, a Swiss bank UBS, stated in a report that Brent would trade at $90 in December or March.

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