Oil up as industries switch from gas, little sign supply crunch easing

Oil prices rose on Friday, and were on track for gains of nearly 5% this week, on signs some industries have begun switching fuel from high-priced gas to oil and on doubts the US government would release oil from its strategic reserves for now.

"A lot of catalysts are out there to keep the oil market tight," said Edward Moya, a senior market analyst at brokerage OANDA. Moya pointed to signs of improved fuel demand as economic activity rebounds and coronavirus restrictions ease, as well as fears that a cold winter will further strain gas supplies.

Expectations are high "that nothing in the immediate future will change the significant supply/demand deficit that is in place", said Moya.

Brent crude futures jumped $1.07, or 1.3%, to $83.02 a barrel by 0643 GMT while US West Texas Intermediate (WTI) crude futures rose $1.11, or 1.4%, to $79.41 a barrel.

Earlier in the week, WTI touched a near seven-year high of $79.78, while Brent hit a three-year high of $83.47.

Oil prices rose on Thursday after a Bloomberg reporter said in a Twitter post that the US Department of Energy (DOE) is not considering tapping into its emergency reserves "at this time," nor pursuing a ban on oil exports

But a DOE source told Reuters that was "not accurate", adding that all "tools are always on the table" to tackle tight energy supply conditions.

"Another run-up in prices...could reignite the conversation about whether to take such action (SPR releases) to mitigate rising energy prices," RBC Capital Markets analysts said in a note on Friday.

Overall, the week's run-up has been spurred by soaring gas prices, which have encouraged a switch to oil for power generation, and a decision by the Organization of Petroleum Exporting Countries and allies led by Russia to stick to plans to add only 400,000 barrels per day of supply in November.

Analysts said the surge in gas prices and the extent of fuel switching from gas to oil would be the key factor to watch now.

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

ANZ revised up its fourth quarter 2021 crude oil demand forecast by 450,000 barrels per day (bpd).

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 bpd of gas-to-oil switching demand under normal winter conditions could be significantly overstated," JP Morgan analysts said in a note.