In the wake of Saudi Arabia's announcement last week to extend its voluntary oil production cut of 1 million barrels per day until the end of December, and Russia's decision to prolong its export cut of 300,000 barrels per day for the same period, oil prices have seen a fresh surge.
On Thursday, WTI crude futures rose by 1.7%, breaking the $90 mark for the first time since November of the previous year. Brent crude futures also saw an increase of over 1.6%, reaching a daily high of $93.50 per barrel. Since late June, oil prices have soared by more than 30%.
Currently, with robust demand from the two largest crude oil consumers, China and the U.S., the overall demand for crude oil is at a historic high. Collaborative supply restrictions by Saudi Arabia and Russia have further tightened an already strained supply. Several institutions this week predict even tighter oil supplies in the coming months.
In its latest monthly report released on Tuesday, OPEC forecasts that global supply and demand expectations for this year and the next remain unchanged. This suggests that the global crude oil market could face a supply shortage of 3.3 million barrels per day in the fourth quarter of this year, potentially the largest shortage in over a decade, nearly doubling the third quarter's shortage levels.
The U.S. Energy Information Administration (EIA) raised its Brent oil price forecasts for the next two years by nearly $2 on Tuesday. The EIA now expects Brent crude prices to average $84.46 per barrel in 2023 (previously $82.62) and $88.22 in 2024 (previously $86.48).
The International Energy Agency (IEA) warned on Wednesday that the extension of oil supply restrictions by major OPEC+ member countries could lead to severe supply shortages and pose a threat of continued oil price volatility.
Several recent indicators in the crude oil market reflect the strength of oil prices:
- Prices for some physical grades of crude oil are significantly higher than benchmark prices, indicating refineries are scrambling to purchase crude.
- Fuel prices are considerably higher than crude oil prices as processors try to keep up with robust end-user demand.
- WTI crude futures are experiencing a situation of futures backwardation, where near-term contract prices are higher than those of longer-term contracts, typically signifying a shortage in crude oil supply.
The rise in oil prices is boosting the economies of oil-producing countries. Some analyses suggest that Saudi Arabia might need an oil price close to $100 per barrel to support its government spending and Crown Prince Mohammed bin Salman's ambitious array of projects.
However, high oil prices are hampering efforts to combat inflation in countries like the U.S. and Europe. U.S. inflation data released this week, including the CPI and PPI, showed that inflation rebounded beyond expectations, driven by rising energy prices. The European Central Bank raised interest rates by 25 basis points on Thursday, revising down its economic forecasts for the next three years and raising inflation forecasts for the next two years.
Nevertheless, the IEA believes that due to the absence of production cuts early next year, the oil market's supply deficit will turn into a surplus. The IEA's monthly report states that from next year onwards, the overall oil demand of the Organization for Economic Co-operation and Development (OECD) will decline annually, with global demand growing by 1 million barrels per day next year, less than half of this year's growth rate. This could help cool down the heated oil prices.
