Tight supply expectations send crude oil prices to 10-month highs

Oil prices rise to fresh 10-month highs as OPEC, IEA predict tight supply

Oil prices continued their upward trajectory on Wednesday, reaching their highest levels in 10 months on the anticipation of tight supply throughout the remainder of the year, as suggested by the latest market reports.

WTI crude futures held around $89 per barrel on Wednesday, hovering near ten-month highs, while Brent crude futures surged to $92.5 per barrel, marking their highest point in a decade.

WTI (West Texas Intermediate) is the benchmark for U.S. oil, while Brent acts as a benchmark for international oil prices.

Oil price news: OPEC, EIA and IEA reports send prices upward

Projections from the Organization of Petroleum Exporting Countries (OPEC) indicated a 2.25 million barrels per day rise in global oil demand in 2024 and foresaw a significant deficit of 3.3 million barrels per day (bpd) in the fourth quarter of this year. The International Energy Agency (IEA) foresaw a smaller deficit, asserting that Saudi Arabia and Russia's oil output reductions until year-end will lock in a “significant supply fall” throughout the fourth quarter of 2023.

The IEA assessed the demand deficit at 1.1mn b/d in the final three months of the year — around 100,000 bpd lower than in last month's report.

Commodity analysts Warren Patterson and Ewa Manthey at Dutch bank ING noted that OPEC’s forecast could run counter to the actual market balance:

A report by petroleum industry group API revealed that U.S. crude inventories increased by 1.17 million barrels last week, with rises also observed in gasoline and distillate stockpiles.

Oil price forecast: Analysts say Brent could breach $100 mark by year-end

The continuing supply cuts could lift Brent futures above the $100 a barrel threshold before the end of the year, Bank of America analysts said in a recent comment to Reuters.

Bloomberg Economics has previously suggested that, due to reduced sales volumes, Saudi Arabia may require oil prices to approach nearly $100 a barrel to finance Crown Prince Mohammed bin Salman's ambitious spending initiatives as part of Vision 2030 — an ambitious plan to overhaul the kingdom’s economy, which includes massive infrastructure projects such as the construction of a $500 billion city called Neon.

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Australia-based bank ANZ issued a similar projection in early August, stating that supply tightness triggered by OPEC production cuts would drive Brent to $100/bbl by the end of 2024:

“Supply cuts are finally tightening the oil market. We now expect sharp drawdowns in inventories in the coming months. However, the recent rally in prices remains on shaky ground. The supply tightness is largely managed by OPEC. Any sustained rally in prices is reliant on demand continuing to improve. For the moment, that appears to be the case. There is hope that recently announced stimulus measures can support further growth.

Over the medium term, some red flags that could cap this upside in prices are emerging. EVs in China are increasingly eating into Oil consumption. We expect lost Oil consumption from EVs to hit 260K b/d in 2023. That will reach 1.5M b/d by the end of the decade.

We maintain our end of year price target of $100/bbl; however, upside beyond this looks unlikely in 2024.”

In a more modest projection, the crude oil forecast from the U.S. Energy Information Administration (EIA) read that the Brent price would maintain around the $93 per barrel level throughout the end of the year (up from $88 per barrel in the previous forecast) and begin to decline in early 2024 on non-OPEC production growth and the end of Saudi Arabia’s production cuts.

The EIA’s Brent price forecast for 2024 saw the commodity trading at an average of $88 per barrel next year. The agency wrote:

“Following Saudi Arabia’s September 5 announcement to extend its voluntary 1 million barrel per day (b/d) production cut through the end of this year, we expect that global oil inventories will fall over that period, adding upward pressure to oil prices in the coming months. The Brent crude oil spot price in our forecast averages $93 dollars per barrel (b) in the fourth quarter of 2023 (4Q23). Prices should decline beginning in 2024 as oil inventories build, with prices averaging $88/b next year. The inventory builds next year largely reflect slowing oil demand growth, non-OPEC oil production growth, and the end of Saudi Arabia’s voluntary production cuts.”

“We expect the Brent spot price will remain above $90/b through 1Q24 before averaging $87/b over the remaining three quarters of next year. However, the potential for continued voluntary production cuts creates some upside risk for oil prices,” the EIA wrote.

In its Brent price forecast, economic data aggregator TradingEconomics noted that the commodity was expected to trade at $92.63/bbl by the end of this quarter, according to the platform’s global macro models and analysts' expectations. TradingEconomics’ 12-month forecast for Brent crude had the commodity trading at a potential price of $100.04/bbl by September 2024.

The platform’s WTI price forecast had the U.S. oil benchmark trading at $89.77 by the end of Q4 2023, rising to a potential average of $97.61 in 12 months’ time.

In a comment on Wednesday, Markets.com Chief Market Analyst Neil Wilson noted the impact of higher oil prices on inflation and U.S. Treasury yields:

Oil demand factors: Interest rates and inflation

The release of U.S. consumer price index (CPI) data for August on Wednesday was largely in line with market expectations, with the CPI climbing +0.6% compared to the previous month and 3.7% year-on-year. Core CPI — a reading that excludes volatile food and energy prices — was hotter than expected, increasing 0.3% and 4.3% respectively, versus estimates for 0.2% and 4.3%. Federal Reserve officials focus more on the core reading, as it acts as a better marker of where inflation is heading over the long term.

The U.S. Federal Reserve is anticipated to leave rates unchanged during the upcoming policy meeting next week. That would keep the Fed’s benchmark interest rate — known as the federal funds rate — at a level between 5.25 and 5.5 percent. Opinions vary regarding the possibility of a rate hike in November, depending on how the data unfolds.

As per Markets.com’s Neil Wilson:

The European Central Bank is scheduled to announce its decision on interest rates on Thursday, September 14.

Increases in interest rates can potentially have a dampening effect on economic growth and lead to decreased demand for oil.

When considering commodities, crude oil spots and futures for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.