Oil Prices Rise Again As Supply Worries Escalate And OPEC Maintains Course

Meanwhile, high costs are interfering with efforts to boost U.S. shale output: File Image/Pixabay

Despite gains in the U.S. dollar and Washington announcing a plan to buy back of oil for the nation’s reserve as early as in this fall, oil traders on Thursday continued to worry about supply shortages – and propelled West Texas Intermediate to its highest level since March.

WTI settled up 45 cents to $108.26 per barrel, while Brent gained 76 cents to $110.90 per barrel.

Oil benchmarks remain in backwardation, and the spread between Brent’s two nearest December contracts was almost $13 per barrel Thursday, more than triple the gap at the start of the year.

Also contributing to traders' concerns was the Organization of the Petroleum Exporting Countries (OPEC) and its allies, which on Thursday said China’s Covid lockdowns threatened demand and agreed to nominally increase production by only 432,000 barrels per day (bpd) in June - although Fatih Birol, executive director of the International Energy Agency, said the cartel could release more oil stockpiles if needed.

Ajay Parmar, senior oil market analyst at ICIS, said in a research note, "OPEC+ is unlikely to supply additional oil into the market to resolve any market tightness, as they are very happy with prices remaining above $100/bb; any substantial increase in additional supply from OPEC+ will threaten these high prices, and so instead, they are expected to continue with the slow claw-back of market share throughout 2022."

Yet another cause for consternation among traders was the contention that drilling for shale oil is getting more expensive at the most inconvenient time, with the price boost being so swift and dramatic that CEOs are reportedly revising annual spending plans higher just to preserve crude and natural gas output targets.

John Christmann, CEO of APA Corp, said on Thursday, “Given the substantial supply-chain bottlenecks and scarcity of oil-service equipment and field personnel, any attempt to increase activity in the U.S. will be logistically challenging and capital inefficient.”

Still, high prices continue to benefit energy companies overall, and London-based Shell on Thursday reported record first-quarter earnings of $9.1 billion compared to $3.2 billion in the same period last year and beating expectations of $8.2 billion.

This was contrasted sharply by British media filled with stories about people forced to skip meals or go into debt as they struggle to heat their homes after a 54 percent increase in household energy prices that took effect last month.

Meanwhile, Fiona Cincotta, senior market analyst at City Index, said of Thursday’s crude trading, “With so many contributing factors in play its hardly surprising that volatility has been injected back into the oil price.

“That said, the market hasn’t fully priced in the EU ban on Russian oil, with a final vote still pending, so losses in the oil market could be limited below here.”