Oil prices rise on tight supply, set for weekly gain of more than 2%

Brent crude futures rose 28 cents, or 0.3%, to $84.28 a barrel, after picking up 82 cents in the previous session, leaving the contract set for a 2.3% rise for the week

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London: Oil prices climbed on Friday, heading for gains of more than 2% for the week, on increasing signs of tight supply over the next few months as rocketing gas and coal prices stoke a switch to oil products.

U.S. West Texas Intermediate (WTI) crude futures rose 30 cents, or 0.4%, to $81.61 a barrel at 0156 GMT, adding to an 87-cent jump on Thursday. The contract was heading for a 3% gain on the week.

Brent crude futures rose 28 cents, or 0.3%, to $84.28 a barrel, after picking up 82 cents in the previous session, leaving the contract set for a 2.3% rise for the week.

Analysts pointed to a sharp drop in OECD oil stockpiles, to their lowest level since 2015. Demand has picked up with recovery from the Covid-19 pandemic, with a further boost coming from industry turning away from expensive gas and coal to fuel oil and diesel for power.

“This energy crisis, particularly in coal and gas, has really pushed up the energy complex higher and oil has benefited as a result,” said Commonwealth Bank commodities analyst Vivek Dhar.

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.

“You’re looking at a narrow window where things can tighten considerably, but it’s going to be very weather-dependent,” Dhar said.

RBC Capital Markets analysts said the global oil market is shaping up for a strong bull cycle, led by supply tightening and demand strengthening at the same time.

“We maintain the view that we have held all year – that the oil market remains in the early days of a multi-year, structurally strong cycle,” RBC analyst Michael Tran said in a note.

Earlier, U.S. crude stocks rose by a surprising 6 million barrels, much higher than the modest 702,000-barrel increase analysts had expected. Production edged higher, reaching 11.4 million bpd.

“The continued rise in domestic U.S. oil production pulls the market back down a bit. It should relieve some of the pressure building in the market,” said John Kilduff, partner at Again Capital LLC in New York.

Oil demand is set to jump by half a million barrels per day (bpd) as the power sector and heavy industries switch from more expensive sources of energy, the IEA said, warning that the energy crunch could stoke inflation and slow the world’s economic recovery from the pandemic.

In its monthly report, the IEA increased its global oil demand growth forecast in 2022 by 210,000 bpd, and now expects total oil demand in 2022 to reach 99.6 million bpd, slightly above pre-pandemic levels.

Saudi Arabia dismissed calls for additional OPEC+ production increases, saying the group’s unwinding of production cuts was protecting the oil market from wild price swings seen in natural gas and coal markets.

At its meeting this month, OPEC+ stuck to its previous agreement to increase output by 400,000 bpd a month.

OPEC+, the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, has done a “remarkable” job as so-called regulator of the oil market, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman told a forum in Moscow.

U.S. shale producers have been reluctant to invest in raising output after years of weak returns. U.S. production remains well short of late 2019′s record at nearly 13 million barrels per day. On Wednesday, the EIA said output would rebound to 11.7 million bpd in 2022.

The White House has been in discussions with oil and gas producers about fuel costs, with retail gasoline prices at seven-year highs and winter heating bills expected to rise.

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