Oil Breaches $85 Threshold As Traders Fully Embrace Supply Worries

But not all analysts are impressed with Friday's turn of fortunes: File Image/Pixabay

Traders' sudden shift in concerns from demand destruction due to inflation to supply worries due to a tightening market, which began in the previous session, on Friday caused oil prices to rise to their highest level in over seven months.

Brent settled up $2.02 at $88.85 per barrel, having earlier gained a session high of $88.59 per barrel, the highest since Jan. 27.

West Texas Intermediate settled up $2.42 to $86.05; it rose earlier to $85.67, the highest since Nov. 16.

Phil Flynn, senior market analyst at Price Futures Group, said, "There is a realization the economy is not falling off the map, and signs that demand is near record highs; people have to face the cold, hard reality that supplies are below average."

Indeed, earlier in the week and for the past few weeks, traders all but ignored robust demand in the U.S., where crude inventories have declined in five of the most recent six weeks; additionally, WTI's prompt spread has surged to the strongest level since November as inventories in the key storage hub of Cushing, Oklahoma, continue to be drawn down.

Friday's gains were also supported by news of an easing in the downturn of euro zone manufacturing in August, as well as an unexpected economic rebound in China.

With crude having broken through the $85 threshold, Rebecca Babin, a senior energy trader at CIBC Private Wealth, noted that "To break through and hold we will need confirmation of Saudi-Russia cut extensions and confidence that China stimulus has started to take hold and improve sentiment there....I think we will break above $85 and hold, but we may test and fail a few times first."

Predictably, open interest on $100 call options over the next 12 months rose from about 80,000 contracts in the middle of July to 120,000 on Friday.

However, not everyone was impressed by Friday's trading performance: analysts at Oilprice.com wondered if the oil rally overall had run out of steam.

They stated that (in reference to U.S. futures gaining ground), "Yes, other international benchmark futures have also gained ground, but not by as much as WTI, the main U.S. contract: Brent, for example, has risen less than 5 percent during the same period…

"There is nothing striking or unusual about that, the Brent WTI spread moves all the time, but it suggests that more than 25 percent of the gains in WTI are down to domestic influences, and those influences are far from long-term."