There’s a notable buzz in the oil industry as crude prices recently climbed above the $80 per barrel threshold in London, a sign that fuels demand is bouncing back from the pandemic lows to unprecedented highs. This comeback is unfolding just as OPEC+ is cutting production, spearheaded by Saudi Arabia, leading to a quick depletion of global oil storage.
“The market could significantly tighten,” warns Toril Bosoni, the International Energy Agency’s oil markets chief. The implication? As seasonal demand picks up, oil prices might climb even higher in the third quarter.
While this could put a smile on the faces of bullish traders and energy producers from Texas to Moscow, it also flags a potential risk for the global economy. Economies worldwide, currently enjoying relief from falling fuel costs and easing inflation, could be rocked by a steep rise in energy prices. The political landscape could also see seismic shifts, from President Joe Biden’s reelection bid to Putin’s military operations in Ukraine.
Despite Brent crude surpassing $80 a barrel, it remains uncertain if this is the starting bell for a significant price rally. Economic uncertainties loom in the background, with questionable Chinese economic indicators and rising interest rates. Plus, cheap crude from Iran and Russia is still flooding the markets.
Nonetheless, the oil market seems to have discovered its bottom limit.
During the first half of the year, oil pundits had been downsizing their price predictions. Their hopes of a return to $100 a barrel were thwarted by mediocre economic growth, despite Saudi Arabia’s repeated attempts to pump up prices through controlled production.
However, industry analysts remain optimistic that a stronger market is on the horizon over the next six months. Last week, this long-awaited shift appeared to begin with Brent futures hitting their highest levels since May.
Jorge Leon of Rystad Energy called it the “tipping point the market was waiting for,” hinting at a sizzling summer ahead in the crude market.
The ongoing output cuts by OPEC+ members, including Saudi Arabia, are finally influencing the market. Riyadh’s additional, unilateral cut of 1 million barrels a day launched this month, set to continue into August, is adding further fuel to the fire.
Russia, after initial delays, seems to be chipping in. After spending most of the year maximizing sales to finance its conflict with Ukraine, Moscow has reduced its exports by approximately 25% in the four weeks leading up to July 9.
Standard Chartered Plc. notes that the supply-demand balance tilted from surplus to deficit as early as June. The deficit will more than double in the upcoming months, draining oil inventories by an estimated 2.8 million barrels a day in August.
While some oil traders remain wary of a potential price surge due to uncertainties ranging from China’s contracting manufacturing sector to sluggish growth in Europe and concerns over U.S. interest rates possibly triggering a recession, others remain optimistic.
Saudi Arabia, needing hefty oil revenue to support Crown Prince Mohammed bin Salman’s economic and social transformation plans, has pledged to do whatever it takes to maintain balance in the oil market.
Bob McNally, Rapidan Energy Group president and former White House official, sees an impending price rally. “Unless there’s a sudden economic slowdown, the stars are aligning for a zesty crude price rally to $90 a barrel,” he commented. The next few months will reveal if this forecast holds or if another twist awaits in the ever-volatile world of oil.