Oil futures took a split path on Monday, with the global benchmark ending lower for the first time in three sessions and the U.S. benchmark significantly paring early gains after both touched multiyear highs.
The lofty prices for crude raised the potential for demand destruction in the energy market, an analyst said.
Natural-gas prices, meanwhile, fell by nearly 8% on Monday, as a forecast for warmer weather helped to ease worries about winter energy supplies.
The oil market is likely to see an increase in volatility because of the recent multiyear highs for prices, said Phil Flynn, senior market analyst at The Price Futures Group. However, “from the supply versus the demand side, all the news is bullish.”
Oil production from the Organization of the Petroleum Exporting Countries is lower than anticipated, demand expectations are rising with the expected lifting of the travel ban into the United States for vaccinated travelers, and jet fuel demand should be on the rise, he told MarketWatch.
“On the flip side, we’re already seeing that the high prices of energy are slowing economies in places like China, so I think we do have to be on guard for signs of demand destruction — especially if prices continue their meteoric rise,” said Flynn.
““I think we do have to be on guard for signs of demand destruction — especially if prices continue their meteoric rise.””
— Phil Flynn, The Price Futures Group
Chinese economic data showed the world’s second-largest economy grew 4.9% over a year earlier in July-September, down from the previous quarter’s 7.9%, restrained by a slowdown in construction activity and curbs on factory output as a result of energy shortages.
Flynn said oil prices will likely “continue to rise over the long term, but don’t be surprised to see little pullbacks like this along the way.”
On Monday, West Texas Intermediate crude for November delivery
tacked on 16 cents, or 0.2%, to settle at $82.44 a barrel on the New York Mercantile Exchange, after trading as high as $83.87 — a level last seen in 2014.
December Brent crude
the global benchmark, declined by 53 cents, or 0.6%, at $84.33 a barrel on ICE Futures Europe. Brent traded as high as $86.04 a barrel, not far off its September 2018 high of $86.74 — a push above that level would see Brent also trading at a seven-year high.
Crude has rallied this month, driven by worries over tightening supplies as soaring prices for coal and natural gas lead power generators, particularly in Asia, to begin burning oil.
The Energy Information Administration reported Monday that U.S. coal-fired electricity generation is poised to mark their first annual increase since 2014, up 22% this year from last year, citing the rise in natural-gas pries.
WTI and Brent crude prices had both been climbing together early Monday “reflecting positive seasonality for energy prices with winter approaching,” Colin Cieszynski, chief market strategist at SIA Wealth Management. “As temperatures start to drop, investors may be thinking about heating demand, particularly in Europe where there have been questions about energy supply.”
On Monday, however, November natural gas
fell by 7.8% to $4.989 per million British thermal units, the first finish below $5 since Sept. 23, FactSet data show.
Prices fell 2.8% last week, but still ended last week about 7.8% higher month to date. They tumbled Monday on “mild short-term weather forecasts which have dampened demand expectations,” said Christin Redmond, commodity analyst at Schneider Electric, citing a six- to 10-day forecast from the National Oceanic and Atmospheric Administration.
“This should decrease early heating demand, and leave market balances looser, allowing for the storage deficit to decline further ahead of the start of [supply] withdrawal season,” said Redmond, in a note.
Natural-gas prices saw a brief spike higher early Monday after reports that Russia’s Gazprom may not send more supplies into the market as expected.
Meanwhile, OPEC and its allies, a group known as OPEC+, continued in September to struggle to raise output in line with plans. OPEC+ previously agreed to relax output curbs in monthly increments of 400,000 barrels a day.
OPEC+ in September saw compliance with cuts at 115%, according to Reuters, down from 116% in August. That shows some OPEC+ members are struggling to increase output “due to lack of operating capacity or other production-related issues,” said Warren Patterson, head of commodities strategy at ING, in a note.
“Overcompliance by the OPEC+ on output cuts have been helping crude oil supplies to remain tight,” he wrote, citing Bloomberg data showing that the group has underproduced around 740,000 barrels a day of crude oil in September 2021 compared with the agreed production limit.