Oil Price Fundamental Weekly Forecast – Aggressive Fuel Switching Could Lead to Triple-Digit Prices

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures had an up and down week but when the dust finally cleared, the market was trading higher. The momentum at the end of the week suggests the rally still has more life left.

Last week, December WTI crude oil futures settled at $78.76, up $3.18 or +4.21% and December Brent crude oil futures ended at $82.39, up $3.11 or +3.77%.

Crude oil prices were lifted at the start of the week when OPEC and its allies decided to increase production by 400,000 barrels per day or the level agreed upon by the group in July. Bullish traders were a little nervous ahead of the decision amid talk of an even bigger increase.

Prices retreated mid-week following the release of bearish inventories data from the American Petroleum Institute (API) and the Energy Information Administration (EIA).

U.S. crude oil and gasoline inventories rose last week as production rebounded as more offshore oil facilities returned from last month’s storm-related shut-ins, the Energy Information Administration (EIA) said on Wednesday.

Crude inventories rose by 2.3 million barrels in the week to October 1 to 420.9 million barrels, compared with analysts’ expectations in a Reuters poll for a 418,000-barrel drop.

U.S. gasoline stocks rose by 3.3 million barrels in the week to 225.1 million barrels, the EIA said, compared with analysts’ expectations for a 279,000-barrel drop. Distillate stockpiles, which include diesel and heating oil, fell by 396,000 barrels in the week to 129.3 million barrels, versus expectations for a 1 million-barrel drop, the EIA data showed.

The markets extended their losses after the United States said it was considering selling oil from its strategic reserves and as Russia said it was ready to stabilize the natural gas market.

On Friday, however, WTI and Brent turned around with prices eventually reaching a 7-year high amid reports that some industries have begun switching fuel from high priced gas to oil and on doubts the U.S. government would release oil from its strategic reserves for now.

Weekly Forecast

The surge in natural gas prices in Europe and Asia and the extent of fuel switching from gas to oil will be the key factor to watch now. It’s also the game changing news that could drive prices to $100 before the end of the year.

“An acceleration in gas-to-oil switching could boost crude oil demand used to generate power this coming northern hemisphere winter,” ANZ commodities analyst said in a note, adding that U.S. distillate stocks, which include diesel and heating oil, are at their lowest heading into winter since 2000.

JP Morgan analysts noted that they have yet to hear of significant gas-to-oil switching in the European power sector.

“This means that our estimate of 750,000 barrels per day of gas-to-oil switching demand under normal winter conditions could be significantly overstated,” JP Morgan analysts said in a note.