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Tightening supply likely to drive oil above $100

Output cuts initiated by Opec+ expected to continue

Published: Sun 27 Aug 2023, 3:16 PM

By
Issac John

Oil pumpjacks in Los Angeles, California. — AFP

Oil prices could be on track to hit $100 and even $120 per barrel in the coming months despite the weakness in China’s economy, market experts predicted as they expect the world’s two largest producers, Saudi Arabia and Russia, to extend voluntary output cuts.

While the seven-week old oil price rally triggered by tightening oil markets has suddenly hit the skids after weak economic data coming from China weighed on market sentiment, the key factor in favour of a sustained price rally is the widening supply shortfall, analysts said.

They argue that a highly effective producer output restraint led by Saudi Arabia will create the conditions for a price rally that will take Brent prices above this year’s high at $89.09 per barrel onto their Q4-average forecast at $93 per barrel, with a likely intra-quarter high above $100 per barrel.

Global oil supplies have become increasingly tight since late June as Saudi Arabia and Russia cut production. The kingdom is expected to roll over the voluntary oil cut of 1.0 million barrels per day (bpd) for a third consecutive month into October amid uncertainty about supplies and as the kingdom targets pulling down global inventories further, analysts said.

“The crucial factor for oil is the ongoing supply cuts,” Cole Smead, president and portfolio manager at Smead Capital Management told BBN Bloomberg. “China’s underwhelming economic performance is as bad as it gets and still, oil prices have not fallen apart,” he said, adding that the supply side calls for faster price moves higher than the market has been probably expecting.

Saudi Arabia has extended its voluntary cut into September, with the country’s energy ministry saying that it could be “extended, or extended and deepened.” Russia will also cut oil exports by 300,000 bpd in September, according to Deputy Prime Minister Alexander Novak.

The cuts from Opec+ and Saudi Arabia, coupled with expected continued strength in demand, are set to result in inventory draws for the rest of the year, supporting oil prices, said analysts. “There should be money being thrown around trying to take advantage because if we wait back to $100 or $120 a barrel, I think people are going to feel ‘Gosh, I really missed that,” Smead told BBN Bloomberg.

Bent prices were up 14 per cent in July on the previous month, the biggest monthly increase since January 2022. Prices are trending about 3.0 per cent lower in August than the previous month weighed by China demand worries. China has also been drawing on record inventories amassed earlier this year as higher oil prices drive refiners in the world’s biggest oil importer to scale back purchases, analysts said.

Commodity analysts at Standard Chartered estimate the August global inventory draw clocked in at 2.8 million bpd , with a further 2.4 million bpd draw forecast next month. The experts have predicted that inventory tightening will remain the dominant price driver in the coming months, but have warned the markets are still capable of slipping back into the macro-driven angst that we witnessed in the second-quarter for periods.

The International Energy Agency has revealed that global oil demand grew by 3.26 million barrels per day in Q2, reaching an all-time high of 103 million bpd . The IEA estimates that the call on Opec and inventories will be 30 million bpd in Q3 and 29.8 million bpd , which implies inventory draws of over 2 million bpd in both quarters at current Opec output levels. It assessed Opec output at 27.86 million bpd in July.