Brent Prices Supported by Supply Constraints

Brent which is currently at around US$ 88 per barrel is at a very critical level. This is because of three reasons. The first is the likely onset of winter very soon and the expectations of a strong winter which would require higher consumption of fuel for heating devices. Second, the holiday season is going to be on in the next two months and that is the time most people would take to the highways given the fact that the pandemic prevented mobility in the last two years. But the most important factor that is likely to impact price is that the oil supply from Russia would be curtailed by almost 50% by December of this year. This is because of the disagreement on the proposed capping of the price of Russian oil by European countries. At the same time, it is reported that the purchase of oil by some countries from Russia including in India is likely to be stopped due to the high freight which is bordering on almost an additional US$ 7 to US$ 8 per barrel, which makes it more expensive compared to the supplies from the Middle East or Africa. Therefore, it is highly likely that the supply from Russia may be around 2.50 million barrels per day. Yet another fact concerning supply is that the OPEC output is still about 3 million barrels per day short compared to the target. This shortfall has been met by supply from the Strategic Petroleum Reserve (SPR) of the US on a weekly basis. In the last couple of weeks, the release from the SPR has been to the tune of 7 million barrels for commercial use. The SPR level is at its lowest levels in the recent history. According to some reports the US would replenish the stock that has been released once oil price touches lower levels. It is a fact that close to 15% of the global energy demand has been shifted to renewable and non -conventional energy sources in the last one decade. Despite the strength of the US Dollar as indicated by the Dollar Index, oil price is expected to stay northbound mainly on account of supply factors, and therefore, we could see a retest of higher levels in the coming weeks.


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