Oil extends rally to multi-year peaks at $ 84 a barrel as energy crunch bites

Oil prices extended gains to scale multi-year peaks on Monday, fuelled by the rebound in global demand that has also contributed to power and gas shortages in key economies like China. Brent crude was up $1.39, or 1.7%, at $83.78 a barrel after hitting its highest since October 2018 at $84.60 earlier in the session. U.S. West Texas Intermediate (WTI) crude rose $1.55, or 2%, to $80.90, after touching its highest since late 2014 at $82.18.

The pace of economic recovery from the pandemic, combined with cold weather have supercharged energy demand, coming at a time when pressure on governments to accelerate the transition to cleaner energy has slowed investment in oil projects. At the same time, the Organisation of the Petroleum Exporting Countries and allies, together known as OPEC+, have held back from boosting supply even as prices have risen. Power prices have surged to record highs in recent weeks, driven by widespread energy shortages in Asia, Europe and the United States. Soaring gas prices are encouraging countries to switch to oil for power generation.

“Everything is very much focused on the lack of supply returning at a time when demand appears to be roaring back, said Matt Smith, director of commodity research at ClipperData. There’s the added dimension relating to the potential for fuel switching given global natural gas prices are so high, so it’s been a combination of factors here that are just continuing to propel (oil higher),” Smith said. Analysts have estimated that switching from natural gas to oil could add anywhere from 250,000 to 750,000 barrels per day of crude demand. In India, some states are experiencing electricity blackouts because of coal shortages, while the Chinese government ordered miners to ramp up coal production as power prices surge.

“In broad terms, we have very strong demand for energy around Asia, Europe ahead of the upcoming heavy usage cycle. Oil prices likely to continue to advance here in the near term,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois. The U.S. Department of Energy last week said all “tools are always on the table” to tackle tight energy supply conditions, amid questions about whether the Biden administration is considering tapping into its strategic petroleum reserves (SPR) or pursuing a ban on oil exports to bring down the cost of crude oil. [RIG/U]