Oil reaches $95 with shrinking inventories fanning fresh rally

By InstinctBusiness Oct 2, 20230

The U.S. oil benchmark briefly reached $95 per barrel due to concerns about declining crude supplies worldwide, driven by shrinking stockpiles at a crucial storage hub.

West Texas Intermediate reached its highest point since August of the previous year before stabilizing with marginal fluctuations. This surge in oil prices was primarily propelled by a reduction in inventories at Cushing, Oklahoma, which serves as the delivery point for U.S. futures.

As supplies at this storage hub approach critically low levels needed for normal operations, major price indicators are skyrocketing due to concerns about scarcity. This trend is having a global impact, causing the nearest price differences between WTI and the global benchmark Brent to exhibit exceptionally bullish patterns. Traders are offering significant premiums to secure local crude supplies.

“It really all boils down to concerns over supply tightness continuing and even exacerbating going into the northern hemisphere winter months,” Vandana Hari, founder of consultancy Vanda Insights, said on Bloomberg TV. “You have a market which is very tightly strung right now, almost on the verge of panic.”

Overall US crude stockpiles fell more than expected, according to official data released Wednesday, providing evidence of how rapidly the market is tightening due to supply cuts from Saudi Arabia and Russia.

OPEC forecast a deficit of as much as 3 million barrels a day of crude in the fourth quarter. With demand in the US and China proving resilient, many in the market now see $100 oil as inevitable, even as the dollar rallies and worries about high global interest rates persist.

The physical tightness is being reflected in oil’s futures curve. WTI’s prompt spread — the price difference between the nearest futures contract — has surged to as much as $2.60 a barrel in the bullish backwardation structure, from just 61 cents in the middle of last week. Options trading is also showing concerns about bigger price swings.