Last week, crude oil in London finally surged above the USD80 mark as demands for fuel in China and other parts of the world reached new highs. We say finally, as for most of the year those betting on a tightening oil market have seen those bets come to nothing. Furthermore, the tightening has come at a time when OPEC (for OPEC please read Saudi Arabia and their allies) are engaging in production cutbacks, which will inevitably drain storage tanks across the world.
Experts from the IEA (International Energy Agency) suggest there will be a sharp tightening in the oil market, as they expect seasonal demand to increase which they feel may well convert into an increase in prices as we head into Q3 of 2023. If such a scenario comes to pass, this could also endanger the global economy, which has of course benefitted from declining inflation and a fall in energy costs.
However, certain analysts are still unclear as to whether a return to USD80 a barrel for Brent Crude is the start of a major price rally, as inflation still needs to be kept in check which could mean a further rise in interest rates. Furthermore, there are some unflattering economic indicators coming out of China, and Russia and Iran continue to flood the market with cut-price crude, though Russia has subsequently cut production as outlined below.
Brent futures (the main international benchmark) are now the highest since May this year, with experts predicting a stronger market in Q3 and Q4, with some even pronouncing that it was the “tipping point” the market was expecting. The crude market “is heating up” seems to be the common theme among analysts, as they suggest this is due to output cuts amongst the OPEC members (Saudi Arabia et al) finally having an impact.
Even Russia, who for the most part of this year has boosted exports of crude to fund the war with Ukraine, has jumped on the OPEC bandwagon and reduced output. This was confirmed by the release of tanking tracking data that showed Russia had reduced exports by circa 25% for the four weeks from June 10th to July 9th. Indeed, figures recently released show the balance of supply and demand in June swinging from a surplus to a deficit.
Some traders still remain bearish as they feel demand is somewhat at the mercy of an economic environment that still produces figures that bring a justifiable uncertainty to the market. This includes sluggish growth in Europe, contracting manufacturing in China, and a possible recession in the United States. Even the IEA has reduced their forecast for global fuel consumption.
However, many analysts and experts still feel the price will increase, especially as Saudi Arabia needs oil revenue for their much vaunted social and economic transformation. Many believe the de facto ruler Crown Prince Mohammed Bin Salman may well prolong the current cuts in output, along with the other members of OPEC. Some experts even predict a rally to USD90 per barrel. Evidently, the next few months will be an interesting time in the oil markets.