On the face of it, the recent rally in oil prices ought to have taken a breather last week given that bearish catalysts were in plentiful supply. For starters, the IMF cut its growth outlook for major economies, including the US and China. Shortly after, the release of minutes from the Federal Reserve’s last meeting bolstered expectations for a year-end bond buying tapering. This, in turn, lent support to the dollar. Following this were figures showing US crude production edging closer to levels seen prior to Hurricane Ida. Then came a double whammy of bad news from China. Firstly, Chinese crude imports softened last month, dropping by 15% from a year earlier. Secondly, the near-term outlook was dampened after Beijing issued oil imports quotas for independent refiners for the rest of 2021 that showed total annual allowances were lower than last year. This marked the first time that Chinese authorities have reduced the total volume of crude to be imported in six years.

Yet such is the bullish world of oil that market players were unfazed. Brent scaled $85 for the first time in three years on Friday. The European crude benchmark failed to hold above this level but still finished in the black with a close at $84.86/bbl. Meanwhile, US crude prices found a new home in the 80s. WTI settled at $82.28/bbl. These solid daily gains helped both crude markers score a weekly advance of around 3%. Last week’s price action has confirmed that oil looks comfortable above the psychologically important $80/bbl threshold.

Underpinning this robust price backdrop are tightening oil fundamentals. Updated forecasts from the IEA/OPEC/EIA triumvirate point to a bigger-than-expected supply deficit in the final quarter of this year. All the while, providing a further boon for the oil complex are ongoing fears of an energy crunch. Power prices resumed their uptrend last week, even as Russia hinted that it was ready and willing to provide more gas to Europe if requested. The renewed rally in natural gas prices helped to drive oil prices higher as a result of rising expectations of fuel switching to heating oil and diesel. At the same time, worries that surging energy prices will hurt economic growth are being put on the back burner. Indeed, inflation fears were nowhere to be seen last week despite fresh warnings from the IEA. The agency raised concerns that higher energy costs could derail the global economic recovery.

Currently, the market is clamouring for more oil barrels. And with prices at current levels, it is only a matter of time before the US is likely to ask OPEC for more oil supplies. Such calls will however fall on deaf ears. Last week, Saudi Arabia dismissed calls for additional OPEC+ supply. The country’s energy minister went on to say that the OPEC+ group will be sticking to its existing phased-in approach to returning oil barrels to the market. In the meantime, the White House has been speaking with US oil and gas producers in recent days about helping to bring down rising fuel costs. Then there is always the nuclear option of tapping into its emergency oil reserves. That being said, the impact on oil prices will likely only be fleeting given the extent of the structural supply deficit.

So, where next for crude markets? Odds are that they will continue to display bullish pressure. Demand is outstripping supply heading into the winter months, and this should safeguard upward pressure on oil prices. The $80/bbl level continues to offer plenty of support and a revisit above $85/bbl could trigger an acceleration towards $90/bbl. Yet this is by no means a foregone conclusion. The $90/bbl threshold is widely seen as the trigger of demand destruction.

Even so, some have gone a step further and forecast a return of triple-digit oil prices. Russian President Vladimir Putin and Deputy Prime Minister Alexander Novak hinted that oil may well hit $100 by year-end if the winter in the northern hemisphere turns out to be extra cold. It must be said that such a price would be unsustainable and would cause more harm than good for the global economy. Meanwhile, there are pockets of doubt over whether the oil market will extend its upward momentum. Iraq’s oil minister recently said that oil prices are unlikely to rise further. Similarly, the EIA forecast that Brent prices will remain stable around current levels for the remainder of 2021. Oil’s immediate advance is vulnerable to bouts of profit-taking. Yet it would be foolish not to favour the upside overall. Simply put, the current rally has the legs to keep oil prices on the ascent to new multi-year highs.