Oil Prices Cool On Sudden Sentiment That Demand May Not Be So Intense As Hyped

Still, OPEC continues to fail to pump at expected levels: File Image/Pixabay

Perhaps energy demand won't be so intense after all: that was the sentiment traders entertained on Monday as U.S. industrial data showing signs of weakness compelled them to pair gains, albeit minimally.

West Texas Intermediate rose 16 cents to settle at $82.44 per barrel after earlier hitting $83.87, the highest intraday level since October 2014; Brent dropped 53 cents to end the session at $84.33 per barrel.

The trading activity was the result of news that U.S. September industrial production fell 1.3 percent, below estimates, and this was enough for Bart Melek, head of commodity strategy at TD Securities, to remark that "If these negative trends continue, it implies that industrial demand for energy may be weaker than expected in the future."

John Kemp, commodities analyst at Reuters, expressed a similar view on Monday: "The petroleum position in general, and distillates in particular, are becoming crowded trades, increasing the risk of a sharp reversal in prices if consumption proves weaker than expected, or fund managers attempt to take some profits."

However, given current circumstances, it seems unlikely that worry of the energy crunch will abate any time soon: the Organization of the Petroleum Exporting Countries (OPEC) reported that it cut its production 15 percent deeper than planned in September, compared with 16 percent in August and 9 percent in July, due to Angola, Nigeria, and Azerbaijan being unable to raise output because of lack of investment, exploration, and other issues.

Additionally, the results of several auctions on Monday suggest that Gazprom PSJC, Europe's biggest natural gas supplier, doesn't plan to send more gas via key transit routes through Ukraine next month.

Hans van Cleef, senior energy economist at ABN Amro Bank, said, "These kind of signals from Russia build on the fear that there might be shortages on natural gas during the upcoming winter season."

All of this prompted Marco Dunand, the chief executive officer of commodities trader Mercuria Energy Group Ltd., to make a familiar prediction: that it's "possible" oil will hit $100 per barrel this winter.

He said, "It's difficult to think the psychology of the market can be anything but bullish ahead of the winter: we have a bullish view on commodities and on energy."

That's not to suggest energy producers are reluctant to pump all out, at least in the U.S.: according to a U.S. government report, the Permian Basin of West Texas and New Mexico is increasing output to an average 4.826 million barrels per day (bpd) in October, close to a 4.913 million bpd record set in March 2020 just prior to the pandemic.