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Polar vortex induced oil spike to fade

(ATF) Oil’s surge to 13-month peaks will be shortlived, analysts say, as the polar vortex that has hit the US Midwest and Gulf regions is expected to give way to better weather by the weekend, when normal supply and demand dynamics of the sector should return.

Brent crude climbed 89 cents, or 1.4%, to $65.23 a barrel by 0524 GMT, touching its highest since January 20, 2020. US West Texas Intermediate (WTI) crude futures gained 66 cents, or 1.1%, to $61.80 a barrel, registering its highest since January 8, 2020.

Both benchmarks rose about $1 on Wednesday and have gained more than 6% since their close last Thursday.

“Oil output likely will be hit hard in the short term, particularly in the Permian Basin, where producers, by and large, are unaccustomed to the deep-freeze conditions their colleagues to the north take for granted,” Robert P Ryan and Ashwin Shyam of BCA Research said.

They expect around 7-8 million barrels of production will be lost in the Permian this month, but said it should return next month and restore US output to its previous trajectory. BCA analysts raised estimates of their 2021 average price forecast back to $65 per barrel and lowered their 2022 forecast to $70/barrel.

Texas oil producers and refiners remained shut for a fifth day on Wednesday after several days of blistering cold, and the governor ordered a ban on natural gas exports from the state to try to speed the restoration of power.

The cold snap, which has killed at least 21 people and knocked out power to more than 4 million people in Texas, is not expected to let up until this weekend.

Biggest oil & gas state; exports suspended

Texas produces more natural gas and oil than any other US state, and its operators, unlike those in North Dakota or Alaska, are not used to dealing with frigid temperatures.

The state’s energy sector has been hit hard by the cold, with about 4 million barrels per day (bpd) of daily refining capacity shuttered and at least 1 million bpd of oil production out as well.

Governor Greg Abbott directed Texas natural gas providers not to ship outside the state until Sunday and asked the state energy regulator to enforce his export ban.

Roughly 1 million barrels per day (bpd) of crude production has been shut, according to Wood Mackenzie analysts, and it could be weeks before it is fully restored.

In addition, a larger-than-anticipated draw in the US crude oil inventories added to supply concerns, said Chiyoki Chen, chief analyst at Sunward Trading.

US crude oil stocks fell by 5.8 million barrels in the week to Feb 12 to about 468 million barrels, compared with analysts’ expectations for a draw of 2.4 million barrels, American Petroleum Institute data showed.

Still, with US oil production having taken a hit, there is also a clear demand hit for crude oil, with a number of refiners having shut or reduced operating rates as a result of the conditions and power outages.

“It is estimated that around 3.6 million barrels per day of refining capacity has been idled, and for now at least, crude oil production losses appear to exceed the fall in refinery operating rates. While the colder weather should be behind us by the end of this week, there is the risk that it takes several days for operations to return to normal after the big freeze,” ING’s oil strategists Warren Patterson and Wenyu Yao said.

Tighter global supplies

US Energy Information Administration (EIA) oil inventory data will be released later on Thursday, delayed by a day after a Monday holiday.

Oil’s price rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping that includes Russia.

OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.

On the supply side there were two diametrically opposite trends in operation, BCA Research analysts said, with Saudi Arabia needing higher prices to support its diversification efforts away from oil exports as the principal driver of its economy, and Russia desiring lower prices to discourage another surge in US shale-oil output.

“In our estimation, for the near term – ie, the next two to three years – KSA prefers Brent prices in a range of $70-$75/bbl, while Russia prefers prices in a range of $50-$55/bbl.”

With reporting by Reuters

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Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai

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