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Oil surges as analysts warn of stagflation risk

Brent hits highest since November 2022

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Oil prices rebounded on Thursday after falling in the previous session amid expectations of a tighter supply for the rest of 2023 with demand set to stay robust through to next year.

Brent crude was up $1.45, or 1.58 per cent, at $93.33 by 1336 GMT after touching $93.38 for its highest since November 2022. US West Texas Intermediate crude (WTI) gained $1.38, or 1.56 per cent, to $89.90, having also hit a 10-month high of $90.06 during the session.as commodity analysts said they could not rule out an intra-Q4 high above $100 per barrel. WTI crude is up almost 3.0 per cent this week, up about 13 per cent this year.

Ole Hansen, head of commodity strategy at Saxo Bank, said while Opec can control supply, they have limited influence on demand. “With inflationary pressures from higher energy prices on the rise again, the timing of peak rates may suffer another delay while later rate cuts may end up being less than expected. All developments that carry the risk of stagflation, i.e. low growth and stubbornly high inflation.”

He said the short-term risk of a Brent move above $95 cannot be ruled out. As Opec+ production cuts continue to tighten the market, the price outlook needs to reflect the fact that the group increasingly looked like it was focusing on price optimisation instead of a balanced and stable market. Therefore, the short-term risk of a Brent move above $95 cannot be ruled out, Hansen said.

Saudi Arabia and Russia have extended their oil output cuts to the end of 2023, and the move could result in a substantial market deficit for the rest of 2023, the International Energy Agency said on Wednesday.

“From September onwards, the loss of Opec+ production... will drive a significant supply shortfall through the fourth quarter,” the agency said in its monthly report.

“The oil market looks decidedly tight over the next two to three quarters as supply constraints persist amid robust demand,” said analysts at ANZ Research. “We expect ongoing geopolitical risks and the uncertain economic backdrop to lead Saudi Arabia to maintain these production cuts into Q1 2024,” they added.

Opec in its monthly report said the market may experience a shortfall of 3.3 million bpd in the fourth quarter, potentially driving the biggest deficit in more than a decade. The EIA meanwhile is only predicting a 230,000 b/d shortfall.

Hansen said cuts have been led by Saudi Arabia which including its June 1.0 million bpd has cut its production by around 2.0 million bpd since last September, and at current export levels the Kingdom would need around $110 per barrel for its revenues to match what they generated before they started cutting production in June. “So far this year, according to the IEA, Opec+ production has fallen by 2.0 million bpd with overall losses being tempered by sharply higher Iranian flows. Rising prices have supported a production boost from non-Opec+ suppliers by 1.9 million bpd to a record 50.5 million bpd.”

Commodity analysts at Standard Chartered remain firmly in the bull camp. The analysts have noted that oil prices have been driven higher in Q3 by sharp falls in inventories caused by excess demand, and have predicted that dynamic will continue in Q4.

StanChart has forecast Brent prices in Q4 2023 to average $93 per barrel, a prediction that has remained virtually unchanged for the past 15 months despite Brent trading across a wide $50 per barrel range during that period. That said, the analysts have cautioned that their forecast is a period average rather than a point forecast and hence have not ruled out an intra-Q4 high above $100 per barrel.

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