US oil breaks US$60 a barrel on supply worries

Concerns remain over the sustainability of crude's rally. PHOTO: REUTERS

HONG KONG (AFP, BLOOMBERG) - US oil prices rallied past us$60 a barrel on Monday (Feb 15) for the first time in more than a year, fuelled by concerns about supplies as Texas, America's largest shale patch, is hit by a severe cold snap that traders warn could slash output.

West Texas Intermediate (WTI) surged 2.19 per cent to US$60.77 in Asian trade, its highest since January last year before the oil market collapsed as the coronavirus pandemic battered demand.

Brent crude in London, meanwhile, rallied toward US$64. Traders estimate a few hundred thousand barrels a day of output in Texas may be impacted by well shutdowns, disrupted road transport and power outages due to the extreme weather conditions.

The Arctic blast gripping parts of the US is threatening to crimp supplies from one of the world's top producers just as crude, commodities and equity markets are getting a boost from vaccine and stimulus-driven optimism. The oil markets are now balanced, said Russia's deputy prime minister Alexander Novak last week, with current prices reflecting the market situation.

WTI has surged about 16 per cent since the start of February and Brent posted four straight weeks of gains after Saudi Arabia led the Opec+ alliance in historic cuts this year, causing once-swollen global stockpiles to rapidly normalize. The development highlights the success that the group has had in draining a surplus caused by a virus-induced demand devastation.

On the demand front, American oil demand surged with refiners processing the most crude since March in anticipation of a vaccine-driven boost in gasoline use this summer. US President Joe Biden, meanwhile, sought to rally support for his US$1.9 trillion (S$2.5 trillion) virus relief package that could keep millions on their jobs until more vaccinations are rolled out nationwide.

"The cold snap, the additional Saudi cuts, the fresh US stimulus promise are all helping," said Vandana Hari, founder of Vanda Insights in Singapore. "But the single biggest factor - and one the doubters have probably been missing or disbelieving - is that Covid on a global level is in a retreat, for more than four weeks now."

The wintry freeze is raising the specter of power outages in Texas and ratcheting up pressure on energy prices already trading at unprecedented levels. Spot prices for electricity in Texas are expected to hit the grid's cap of US$9,000 per megawatt-hour. Spot natural gas rose to a record US$600 per million British thermal units in Oklahoma.

Elsewhere, potential strikes in Norway were adding to supply risks for Europe's biggest producer. Equinor ASA warned that union action could lead to shutdowns of its Johan Sverdrup and Troll fields. Security in the Middle East, meanwhile, was in focus after Saudi Arabian authorities blamed Yemeni rebels for an attack at an airport in the kingdom's southern region.

Still, concerns remain over the sustainability of crude's rally. WTI futures' 14-day Relative Strength Index remains well above 70 in a sign that the commodity is due for a pullback. Meanwhile, the threat of new virus strains and cases in parts of China may place a cap on what's been a dramatic recovery in fuel consumption, with the International Energy Agency last week cutting its demand forecast for 2021 and describing the market as fragile.

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