Oil Prices Reach 10-Month High as Saudi Arabia and Russia Extend Supply Cuts
Oil prices surged to a 10-month high on Tuesday, hitting their highest level since November, following the announcement by Saudi Arabia and Russia that they would extend their voluntary supply cuts until the end of the year. This news has raised concerns among investors about potential shortages during the peak winter demand.
Brent crude futures soared by $1.04, or 1.2%, settling at $90.04 per barrel. This marks the first time since November 16, 2022, that Brent crude closed above the $90 mark. Similarly, US West Texas Intermediate crude (WTI) futures climbed $1.14, or 1.3%, settling at $86.69 a barrel, also reaching a 10-month high.
Market expectations were initially for Saudi Arabia and Russia to extend the cuts until October. However, the unexpected three-month extension prompted Jorge Leon, senior vice-president at Rystad Energy, to comment, This is a clear indication that oil prices trump volume (for Saudi Arabia). Leon added, These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide.
Both Saudi Arabia and Russia have stated that they will review the supply cuts on a monthly basis and may adjust them based on market conditions.
UBS analyst Giovanni Staunovo noted, With the production cut extended, we anticipate a market deficit of more than 1.5 million barrels per day in 4Q23. As a result, UBS now expects Brent crude to rise to $95 a barrel by the end of the year.
Highlighting concerns about short-term market supply, front month Brent and WTI contracts are trading at their steepest premium since November compared to later-dated prices. This situation, known as backwardation, indicates a tightening supply for prompt deliveries.
Additionally, Goldman Sachs’ prediction of a reduced probability of a US recession within the next 12 months, adjusting from 20% to 15%, further supported the rise in oil prices. Combined with the Saudi supply cuts initiated in July, the prospects of the US economy avoiding a significant downturn have contributed to increased oil demand and prices in recent months.
Both Brent and WTI futures have seen a gain of over 20% since the end of June.
In conclusion, the extension of supply cuts by Saudi Arabia and Russia, along with positive economic indicators, has propelled oil prices to a 10-month high. Investors are closely monitoring this situation as it raises concerns about potential shortages during the winter demand peak. As the market tightens, the global oil price is expected to rise, impacting consumers worldwide.
