Oil Hits Multi-year High above $86, before Pulling Back

Tight supply and a global energy crunch pushed oil to reach a three-year high above $86 a barrel on Thursday. Prices, however, eased, as some investors took profits on indications the rally is looking overstretched.

Adding more gains was a supply report from the U.S. Energy Information Administration on Wednesday, where crude and fuel inventories were shown to have tightened. Moreover, crude inventories at the Cushing storage hub have fallen to a three-year low. 

Brent crude rose to the highest since October 2018, at $86.10. But it dropped 92 cents, or 1.1%, to $84.90 by 1155 GMT.  Also, U.S. West Texas Intermediate crude fell 74 cents, or 0.9%, to $82.68.

Louise Dickson of Rystad Energy said traders who had set $86 as their selling threshold took the opportunity to already pocket some profit. Oil prices took a dive as a result, he added.

Brent price has climbed over 60% this year.  It was supported by a slow ramp-up in supply by the Organization of the Petroleum Exporting Countries and allies (OPEC+). Additionally, a global coal and gas crunch which has prompted a switch to oil for power generation.

Coal and Natural Gas

A drop in coal and natural gas prices also weighed on the oil. On Thursday, coal fell 11% in China. It extended losses this week since Beijing signalled it might intervene to cool the market.

Jeffrey Halley, analyst at brokerage OANDA said that with coal and gas prices easing and with the relative strength index technical indicators still in overbought territory, the odds of a sharp, but material fall in oil prices are rising.

Nevertheless, some analysts are calling for oil to rally even more as OPEC+ is likely to stick to its plan for gradual output increases. That is while demand is expected to reach pre-pandemic levels.

Rystad said the outlook was bullish for the rest of the year. In a report, Giovanni Staunovo of Swiss bank UBS said he expected Brent to trade at $90 in December and March.

Meanwhile, sources have said the Group of 20 rich countries are divided over phasing out coal and committing to limit global warming to 1.5 degrees Celsius. They are preparing for a crucial summit in Rome next week.

The Rome G20 gathering on Oct. 30-31 is seen as a key stepping stone immediately ahead of broader United Nations climate talks, called COP26, to be held in Glasgow, Scotland. The need to curb greenhouse gases will be high on its agenda.