Oil prices may remain on the boil amid strong demand, supply cuts

Saudi Arabia and Russia have announced a fresh extension to their voluntary supply cuts, amounting to a combined 1.3 million barrel per day (bpd) cut for another three months till December

Brent crude oil prices surged nearly 9 per cent in the past fortnight and topped $90 a barrel (bbl) on Tuesday for the first time since November 2022. Oil breached the $90 mark after Saudi Arabia and Russia announced a fresh extension to their voluntary supply cuts, amounting to a combined 1.3 million barrel per day (bpd) cut for another three months through December.

At 8.37 pm IST on Wednesday, Brent crude was trading slightly down at $89.5 a barrel. 

Analysts at Rabobank International expect the crude oil prices (Brent) to continue their journey north amid firm demand and restricted supply, though economic updates/releases from China could cap the runaway rally. Brent, they said in a recent note, will trade between $72 a bbl and $88 a bbl until Q4CY23 amid intermittent spikes.

“Brent crude held a continuous rally from $74 a bbl to $85 a bbl over the month of July, which marched into August as well. We see the current macro overhang and worsening Chinese economic data to keep a ceiling on oil prices. However, if we are incorrect, crude will continue to consolidate at a higher range, with the next resistance levels at $93 a bbl and $98 a bbl,” wrote Joe DeLaura, senior energy strategist at Rabobank International in a recent note.

Meanwhile, global oil production was 93.9 mn bpd in 2022. The International Energy Agency (IEA) projects global oil demand to expand 1.5mn bpd to a record 101.5 mn bpd in 2023, with the US driving non-Opec+ gains of 1.9 mn bpd.

Oil supply from the Opec+ alliance, meanwhile, fell by 1.2 mn bpd to a near two-year low as a voluntary reduction from Saudi Arabia came into effect. At 50.7 mn bpd, the bloc’s production was down over 2 mn bpd from the start of the year.

Over the same period, producers outside the group ramped up their output by 1.6 mn bpd to 50.2 mn bpd but limited non-OPEC+ gains are expected for the remainder of the year, the IEA said. For the year, the agency expects global oil demand to expand by 2.2 mn bpd to 102.2 mn bpd, its highest ever annual level.

Volatile year

Oil prices have been volatile thus far in CY23, falling from around $86 a bbl at the start of the year to around $71 a bbl in May/June 2023.

The best explanation for oil’s price decline in the first half of 2023, according to Christopher Wood, global head of equity strategy at Jefferies, remains that the Joe Biden administration (in the US) has continued to drain oil from the Strategic Petroleum Reserve (SPR), despite an official statement in October 2022 that it would do the exact opposite.

“The Biden administration has stopped draining oil out of the SPR for the past four weeks, which has coincided with the rally in the oil price. The oil market, meanwhile, has of late refocused on the fundamental supply constraints," Wood said.

The two key variables, according to Paul Hickin, an independent oil market analyst who runs Petroleum Economist, are how long Saudi Arabia and Russia continue their supply cuts, and the economic data coming from China, which will impact global oil demand.

“The oil markets are bullish but may be underplaying the China story as weakness there will provide a cap. The cuts from Saudi Arabia and Russia were expected. Continued production cuts by the Saudis and a rise in demand can see Brent crude reach near the $95 a bbl mark. Oil at $100 could be a possibility, but one needs to ascertain the extent to which it will cause demand destruction,” Hickin said.