The recent rise in WTI crude prices can be attributed to the anticipation of increased demand for heating fuel, spurred by sustained cold weather across the Northern Hemisphere. According to JP Morgan, this uptick is also fueled by growing concerns about potential disruptions in oil supply caused by several factors.
On Friday, during European trading hours, West Texas Intermediate (WTI) crude saw its price climb for the second day in a row, hovering around $73.90 a barrel. The prolonged cold spell affecting vast regions in the Northern Hemisphere is strengthening expectations for higher heating fuel requirements, thus boosting crude oil prices.
The US Weather Bureau has predicted colder than usual temperatures for central and eastern parts of the country. Europe is also under the grip of an intense cold wave, likely to lead to an unusually harsh beginning of the year.
Reuters reports that JP Morgan analysts ascribe the rising oil prices to escalating concerns about supply shortfalls due to stricter sanctions. This, coupled with low oil stocks and severe weather in parts of the US and Europe, is contributing to the situation.
Additionally, geopolitical tensions are causing unease over potential supply breakdowns. President Joe Biden is set to unveil fresh sanctions this week focused on curtailing Russia’s oil revenue. This move is part of a strategy to enhance Ukraine’s resistance against Russia before President-elect Donald Trump assumes office on January 20.
ING analysts commented on Friday that there is a significant amount of uncertainty about how aggressively Trump will address Iran, which is adding further support to crude prices. They noted that Asian buyers are already seeking other sources, particularly from the Middle East, due to the complex trade flow issues arising from broader sanctions on Russia and Iran.
Understanding WTI Oil
West Texas Intermediate, commonly known as WTI, refers to a type of crude oil sold globally. It stands alongside Brent and Dubai Crude as one of the three key types. WTI is often called "light" and "sweet" due to its relatively low density and sulfur content, respectively, making it a high-quality oil that refines easily. Originating in the United States, WTI oil is distributed through the Cushing hub, known as "The Pipeline Crossroads of the World." It serves as a significant benchmark for the oil market, with its price frequently featured in the media.
Supply and demand primarily drive WTI oil prices. Global economic growth can boost demand, while a weak global economy can have the opposite effect. Political instability, conflicts, and sanctions might disrupt supplies, influencing prices. The decisions by OPEC, the coalition of major oil-producing nations, also play a crucial role in determining oil prices. Moreover, since oil is predominantly traded in US dollars, the currency’s value impacts WTI crude prices—a weaker dollar usually makes oil cheaper and vice versa.
Weekly reports from the American Petroleum Institute (API) and the Energy Information Agency (EIA) also have implications for WTI oil pricing. These reports reflect the changing dynamics of supply and demand. A decrease in inventories might suggest increased demand, driving prices up, whereas higher inventory levels can signal excess supply, pushing prices down. API releases its data every Tuesday, followed by the EIA on Wednesday. Typically, these reports align closely, with results within 1% of each other about 75% of the time, though the EIA data is regarded as more reliable since it’s a government source.
OPEC—a group of 12 oil-producing countries—holds bi-annual meetings to set production quotas for its members. These decisions often influence WTI oil prices. A reduction in quotas can tighten supply, causing prices to rise, while an increase in production generally has the opposite effect. The term OPEC+ includes an additional group of non-OPEC members, with Russia being the most significant among these.
