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No Signs For An End To The Rally In Crude Oil Prices

As prices continue moving higher, energy-related inflation could pose a threat to continued economic growth.

Federal U.S. data that showed an increase in commercial crude oil inventories was overshadowed by broader market issues surrounding energy inflation, analysts told Zenger.

The U.S. Energy Information Administration publishes weekly data on commercial storage levels of crude oil, gasoline and other refined petroleum products. Increases are usually indicative of lackluster demand, while the opposite holds for drains.

The administration reported Thursday, a day later than usual because of a federal holiday on Monday, that commercial crude oil inventories increased by 6.1 million barrels from the previous week.

That would normally send the price of oil lower, but a perfect storm of factors suggests the rally is continuing on momentum alone.

Giovanni Staunovo, a commodities analyst at Swiss investment bank UBS, said the weekly report was bearish.

“The support for crude prices has come from the IEA raising their demand estimates,” he said, referencing the International Energy Agency.

It was a trifecta week, with the U.S. Energy Information Administration, the Paris-based International Energy Agency and the Organization of the Petroleum Exporting Countries all issuing their monthly market reports for October.

In Moscow, it was a pantheon of energy figures as the Kremlin hosted its annual energy conference.

The International Energy Agency in its report Thursday said the ongoing rally in natural gas prices is creating tailwinds for other commodities. The industry looks to save costs by turning to other fuels, thereby transferring demand from gas to alternative products.

“Record coal and gas prices, as well as rolling blackouts, are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming,” the report read.

The Biden administration has been pressuring oil producers to do more to calm the market. (White House)

The ongoing rally is sparking concerns that energy inflation will undermine global economic health.

The White House has reached out to the Organization of the Petroleum Exporting Countries to help soothe the market — but to no avail. White House spokesperson Jen Psaki said on Wednesday she was “not aware” if there’s been any outreach to domestic oil and gas companies about production.

Federal data show a small weekly increase in domestic crude oil production. But to date, the domestic sector is producing less than it did last year, when demand destruction during the height of the pandemic hammered the industry.

Through the first full week of October, domestic crude oil production is down 6.2 percent compared with last year. On the refining side, Phil Flynn, a senior energy analyst at The PRICE Futures Group in Chicago, said supply-chain issues may help explain some of the build in domestic crude oil inventories.

“It was a shocking build in crude oil inventories, but apparently the build wasn’t because demand was weak,” he said, “it was because of issues on the refining side.”

Federal data show domestic crude oil inventories near the low-end of the historic average, a problematic issue, given the flip from natural gas to oil. (Graph courtesy of the U.S. Energy Information Administration)

Edward Moya, a senior market analyst at broker OANDA, echoed that concern, telling Zenger some refiners are down because of regular maintenance.

Crude oil prices are up approximately 3.3 percent so far this week, as of early Friday.

A federal market report issued earlier this week estimated a 37 percent chance that West Texas Intermediate, the U.S. benchmark for the price of oil, would post a fourth quarter average higher than $80 per barrel, though it was already above $82 in early Friday trading.

The last time U.S. crude oil prices were this high and OANDA’s Moya said the bulls have plenty of room to run was late October 2014.

“This weekly EIA crude oil inventory report should not change the very bullish short-term outlook for crude prices,” he said.

Edited by Bryan Wilkes and Fern Siegel