Oil prices on Tuesday edged higher on the fears that OPEC members would tighten supply. Brent crude November futures rose by 3 cents at $88.58 a barrel, while US West Texas Intermediate crude (WTI) October futures rose 9 cents to $85.64 a barrel.
The slight gains in Asian trade came after both contracts ended last week at their highest levels in more than half a year, having weakened in the two previous weeks.
“Crude oil prices have been primarily driven by the anticipation of additional supply cuts from major oil-producing nations, Russia and Saudi Arabia,” said Sugandha Sachdeva, executive vice president and chief strategist at Acme Investment Advisors.
Sachdeva noted, however, that the steady increase in US oil production could limit further significant gains in price.
Russian Deputy Prime Minister Alexander Novak said earlier that Russia had agreed with partners in the Organization of the Petroleum Exporting Countries (OPEC) on the parameters for continued export cuts. An official announcement with details of the planned cuts is expected this week.
Russia has already said it will cut exports by 300,000 barrels per day (bpd) in September, following a 500,000 bpd cut in August. Saudi Arabia is also expected to roll over a voluntary 1 million bpd cut into October.
Meanwhile, in China, manufacturing activity unexpectedly expanded in August, data from Caixin’s manufacturing PMI survey indicated, reducing some of the pessimism about the economic health of the world’s largest oil importer.
A series of economic support measures announced by Beijing last week, such as deposit rate cuts at some of the country’s largest state-owned banks and an easing of borrowing rules for home buyers, have also supported prices.
However, investors continue to await more substantial moves to prop up the country’s embattled property sector, which has been one of main drags on the Chinese economy since its emergence from the pandemic.
Saudi Arabia announced earlier today that they will extend the 1 million bpd voluntary cuts until December 2023.
This is a clear indication that oil prices trump volumes for the Kingdom.
Russia also announced the extension of its voluntary export cuts of 300,000 bpd until the end of the year.
These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide.
The decisions surprised oil markets, and prices reacted strongly and suddenly following the announcements.
ICE Brent front month jumped from $88.5 per barrel to over $90.5 per barrel, the highest price since November 2022.
We are now predicting global liquids demand will surpass supply by around 2.7 million bpd in the further quarter of this year
The big question is: Are the Saudis worried about global demand in the final quarter of 2023, particularly in China, so that they need to take preempted measures?
Chinese macroeconomic sentiment is a potential downside risk, but our latest mobility indicators do not show an imminent deceleration that could justify such a move by Saudi Arabia.
The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the US, to curtail inflation.
Western leaders, wary of an oil price spike, could explore import adjustments or open diplomatic discussions to help mitigate the impact and tame inflation.
The extension of this longer cut until December implies a significant shift in our balances.
Moreover, this would lead to the highest semi-annual deficits since the second half of 2021 but with the added pressure of starting from much lower stock levels both for crude and products.
