Oil prices at ten-month highs on worries over supply shortage

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Crude oil prices clocked at a ten-month high last week, driven by worries about supply shortages after an unexpected extension of voluntary supply cuts by Saudi Arabia and Russia. Hopes of a delay in further rate hikes by the US Federal Reserve and positive fuel demand from China aided the demand outlook.

The most active US WTI crude tested $88 a barrel level, while the Asian benchmark Brent crude pushed above $90 a barrel, for the first time since November last year. A similar move was witnessed in the domestic futures market as well.

In April, the key oil-producing countries including Russia is commonly known as OPEC Plus, announced a combined production cut, proposed to extend till 2024 aimed at supporting market stability. However, Saudi Arabia and Russia voluntarily introduced additional reductions in production on top of the broader deal by the OPEC plus countries.

Saudi announced a reduction of 1 million barrels of oil per day from July while Russia started cutting down daily production by 300,000 barrels per day. There were expectations in the market that both countries would extend the supply cut into October, but they surprised the market by extending the program till the end of December.

Both countries also informed that the plan would be reviewed monthly and adjusted according to market conditions. This has raised worries that demand will exceed supply in the coming quarter sending prices to multi-month highs.

Economic stimulus measures taken by the Chinese government to boost the country’s faltering economy are expected to raise the demand for oil. The latest data from the country shows that crude oil imports in August surged by 30.9 percent from a year earlier as refiners built inventories and increased processing to benefit from higher profits from exporting fuel.

A private sector survey from the country shows that the government’s efforts have had some effect on its economy with improved factory activity, an increase in supply and domestic demand, and employment in August. Earlier, there were concerns that the soft economic outcomes would eventually translate into weak oil imports and demand from the world’s largest importer and second-largest consumer of crude oil.

Oil prices also disregarded the pressure from a strong US dollar which is currently hovering above a six-month high. There is a general consensus that the US Federal Reserve will hold interest rate in its next meeting. Delaying rate hikes would buoy the economy and boost the demand for fuel.

The latest upbeat economic numbers from the US soothed investor worries about an imminent recession. Besides, the European economy returned to growth as inflation continued to fall in the second quarter of 2023 raising firm demand outlook from the West.

Shrinking inventory levels in the US is another reason for adding upward pressure on global oil prices. Currently, US oil stock levels are running at their lowest level this year and are expected to shrink further. Record demand, producer supply cuts, and rising storage costs point to increasing drawdowns.

Looking ahead, though a tight supply outlook offers support to oil prices in the immediate run, other catalysts like worries over the global growth outlook and a firm US currency likely to halt major gains. On the price side, US WTI crude has stiff resistance at $94 a barrel which needs to be cleared for further rallies. Otherwise, there are chances of a choppy with mild negative bias trading on the cards.

First published in Economic Times

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