Oil Hits 10-Month High Over Supply Tightening

Oil Hits 10-Month High Over Supply Tightening

Oil hit a 10-month high on Wednesday as a result of supply tightening by members of the Organisation of Petroleum Exporting Countries and allies (OPEC+). Consolidating position further, the West Texas Intermediate crude oil rose to a fresh 10-month high on Wednesday as traders assess the impact of Saudi Arabia’s day-prior announcement that its one-million barrel per day production cut will be extended to year-end.

November Brent crude, the global benchmark, was last seen up US$0.88 to US$90.92. WTI crude for October delivery closed up US$0.85 to settle at US$87.54 per barrel.

Global oil inventories are expected to continue to decline following the Saudi extension, which was matched by 300,000 bpd of cuts through year end by Russia as OPEC+ looks to support prices that had dipped on slow demand from China. Unlike the cartel’s prior cuts, the United States is unlikely to counter by releasing supplies from its now depleted strategic oil reserve.

“With no blockbuster SPR release looming, the White House does not have many robust options left to tame crude prices,” Helima Croft, Head of Global Commodity Strategy and MENA Research at RBC Capital Markets said in a note. Still, the cuts come following the end of the summer driving season as demand weakens into autumn, which could limit the impact on prices for the commodity.

“We see the extension being driven by Saudi Arabia’s desire to keep stable to higher prices into a period where macroeconomic concerns continue to weigh and demand for crude oil slows as maintenance cut refinery demand,” Ole Hansen, head of the commodity strategy at Saxo Bank, noted.

Saudi Arabia is also promising to review its cuts on a monthly basis, which may allow the country to taper its export cut should the market see any supply or demand shocks. The oil market continued to rally after Saudi Arabia and Russia announced that they would extend their respective crude production cuts until the end of the year.

Global oil prices also have support from expectations that Thursday’s weekly EIA crude inventories will fall by -2.0 million bbl. Over an extended period, crude oil prices have support after Saudi Arabia on Tuesday said it would maintain its unilateral crude production cut of 1.0 million bpd through December.

The move will hold Saudi Arabia’s crude output at about 9 million bpd, the lowest level in three years. Also, Russia on Tuesday announced it would also maintain its 300,000 bpd cut in crude production through December.

An increase in Iranian crude exports is boosting global supplies and is bearish for oil prices. According to TankerTrackers.com, Iranian crude exports rose to a 5-year high of 2.2 million bpd during the first 20 days of August, with most of the crude going to China.

A negative factor for crude prices is the progress made in Iran-U.S. relations that could lead to higher crude exports from Iran after the country said the recent deal with the U.S. on the release of prisoners and frozen Iranian funds could lead to diplomacy in other areas, including its nuclear program.

An agreement on Iran’s nuclear program could eventually prompt the U.S. and its allies to remove sanctions on Iranian crude exports, boosting global crude supplies.

In a bearish factor, China’s July crude imports fell -19% month on month to 10.33 million bpd, the smallest volume in 6 months. Also, Vortexa said China’s onshore crude inventories have expanded to a record 1.02 billion bbl as of July 27.

A decline in crude demand in India, the world’s third-biggest crude consumer, is bearish for oil prices. India’s July crude oil imports fell -6.3% year on year to 19.3 MMT, the lowest in 8 months.

OPEC crude production in August was little changed, rising +40,000 bpd to 27.82 million bpd, recovering slightly from July’s 1-3/4 year low of 27.78 million bpd. Last Wednesday’s weekly EIA report showed that U.S. crude oil inventories as of Aug 25 were -3.5% below the seasonal 5-year average. Oil Slides over Weak Economic Growth Outlook in China