Oil prices have reached their highest levels this year, following the announcement that Saudi Arabia and Russia will continue production cuts until the end of the year. The extension of the output reductions is “very bullish” and means that oil supplies will continue to tighten into the end of the year, according to Phil Flynn, senior market analyst at The Price Futures Group.
The move by some of the world’s biggest oil producers may lift U.S. benchmark West Texas Intermediate crude above $100 in the months ahead, as stated by some analysts. On Tuesday, global benchmark Brent crude for November delivery traded above $90 a barrel to the highest levels year to date.
According to the country’s official press agency, Saudi Arabia will extend its voluntary cut of 1 million barrels a day to the end of the year. Russia’s Deputy Prime Minister Alexander Novak has also announced that his country will extend its additional voluntary cut in oil supplies by 300,000 barrels a day until the end of December.
The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, did not want to “keep the drama up month after month, having the market speculate on whether they would keep production cuts in place,” according to Flynn. The three-month extension is “really sending a message that they have gained control over the market.”
While the move by Saudi Arabia may continue to support prices into year-end, some experts believe that the kingdom may not be willing to keep cutting exports and losing market share into 2024 if Brent crude remains below $90 a barrel.
The extension of the production cuts comes as demand uncertainty continues to hang over the market outlook. The Saudis’ month-to-month production cuts had been taking place during the strongest demand season of the year, but demand historically starts to decline in September and refinery turnarounds begin, lowering physical demand for crude.
It is still uncertain whether the extension of the production cut by the Saudis is the right move, according to McNally of Third Bridge.
The Chinese market is crucial in determining the future of the oil industry. Demand in China has been underwhelming for over a year now, while global inventories have moved lower as a result of output cuts and solid demand in other parts of the world, he said.
Energy equity analyst Stewart Glickman from CFRA Research thinks that the production cut extensions are the “right move if you are a producer”, but for the oil market, there are risks, including weakness in the Chinese economy or a possible U.S. recession, which would both negatively impact global energy demand.
Glickman also mentioned that there is a point where more cuts would be too much, but that point is probably if WTI prices go north of $120 [a barrel], and we’re not there yet.
Oil futures are currently experiencing backwardation, which means that futures contracts expiring in later months are trading lower than current prices. Backwardation is a “signal of greater spare capacity that could come back in the future, putting pressure on forward prices,” said McNally.
McNally also pointed out that Saudi Arabia’s production is currently at its lowest level in years to achieve the prices and balances that we are seeing today.
In the future, Saudi Arabia will “look to reclaim some [oil market] share,” implying an increase in Saudi output.
The Price Futures Group’s Flynn, however, believes that the risk of $100 a barrel by the end of the year has “gone up markedly” since the output cut announcements by Saudi Arabia and Russia.
According to Flynn, “the possibility of increasing supply draws in the coming months and the possibility that this winter might not be as warm as last could send us to that [price] mark before the end of the year.”
Flynn also states that “talk of slowing Chinese oil demand has not materialized” and for now, the trend for oil is much higher.
Brent Long (Buy)
Enter At: 91.27
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