In the dynamic realm of global oil markets, recent developments have stirred a blend of optimism and uncertainty. In an in-depth oil market review published on Monday, Bank Leumi’s chief economist Dr. Gil Bufman elaborated on the intricacies propelling these fluctuations.
Oil price odyssey: Brent crude surpasses $86.5 per barrel
Oil prices have been on a tear lately, with Brent crude crossing the $86.50 per barrel mark last week. This impressive surge is due to a number of factors, including supply disruptions from Saudi Arabia and Russia, a rebalancing of net oil imports, and a significant increase in US oil exports. As a result of that demand increase, however, the amount of commercial crude oil in the United States decreased by nearly 17 million barrels by the end of July 2023.
At present, current commercial inventories are about 1% below the five-year average for this time of year. This 2% drop from the previous level is a sign of things to come and a testament to the volatility of the oil market.
Navigating uncharted waters: US strategic oil reserves
With oil prices inching toward $80 per barrel, there is speculation regarding the United States’ course of action. It's possible that they'll delay buying oil for the Strategic Petroleum Reserve — a stockpile of crude oil that the United States government maintains to help protect the nation from disruptions in the oil supply — since prices are currently so high. The government usually buys oil when prices are around $70 per barrel, so it's unlikely they'll do anything until prices reach that level.
However, it's also unlikely that oil prices will return to $70 a barrel anytime soon. The dip in prices that the US is waiting for would require Saudi Arabia to unexpectedly increase oil production, but according to Bufman’s analysis, that’s not in the cards.
Saudi Arabia is serious about lowering oil production
Saudi Arabia will cut its output by 1 million barrels per day in September, bringing its daily production to 9 million barrels, in accordance with the current policy determined by OPEC+, a group of 23 oil-producing countries that have agreed to coordinate their oil production policies.
Likewise, Russia will also slightly reduce its oil exports for the same period. These lower production limits are already driving up oil prices, and there is a fear that if demand picks up, there could be a shortage of supply.
Across the pond, the US saw natural gas prices gradually fall to $2.57 per MMBTU (the unit used to measure the amount of energy in gas, oil, and other fuels). Despite the decline, prices remained relatively high due to increased electricity demand from the ongoing heatwave. A similar story unfolded in Europe, where natural gas prices rose slightly to around €28.45 per MWh. Although they are below the €30 mark, Bufman noted, these prices are still volatile in a dynamic market.
The oily road ahead
The future trajectory of oil prices hinges on pivotal decisions made by OPEC+ concerning export quotas and the voluntary production curtailment strategies championed by Saudi Arabia and Russia. Furthermore, the anticipated upswing in US economic activity in the latter half of 2023, coupled with the backdrop of a waning dollar, may amplify oil demand.
Based on this, it looks like Brent crude prices will hover between $82 and $90 per barrel for the rest of 2023. The global oil market is constantly changing and keeping stakeholders on their toes as the complex dance between supply, demand, and global dynamics continues.