By Andrew Moran
U.S. crude oil prices firmed above $81 as supply fears dominated global energy markets toward the end of the trading week, driven by news from Saudi Arabia and Russia.
The Ministry of Energy in Riyadh announced extending a voluntary production cut of 1 million barrels per day (bpd) into September. The energy powerhouse implemented the reduction in July to establish a price floor of $70, and the decrease was poised to run through the end of August. But the Saudi Kingdom confirmed on Aug. 3 that it would be extended for another month and the move “can be extended or extended and deepened.”
In September, Riyadh’s oil output will be approximately 9 million bpd.
“This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC [Organization of the Petroleum Exporting Countries] Plus countries with the aim of supporting the stability and balance of oil markets,” the ministry said in a statement.
While industry observers had widely expected the move, there was some doubt due to the Middle Eastern country’s slowing economy. In the second quarter, the GDP growth rate came in at an annualized pace of 1.1 percent, down from 3.8 percent in the first quarter.
Soon after Saudi Arabia made the decision, Russia revealed that it would slash oil exports by 300,000 bpd next month, in addition to its previous effort to decrease crude production by roughly 500,000 bpd until the year’s end.
“Within the efforts to ensure the oil market remains balanced, Russia will continue to voluntarily reduce its oil supply in the month of September, now by 300,000 barrels per day, by cutting its exports by that quantity to global markets,” said Deputy Prime Minister Alexander Novak in a statement.
Meanwhile, an OPEC+ panel is scheduled to meet on Aug. 4, but market analysts say that it is unlikely that officials will make any alterations to output policies.
The meeting comes after a Bloomberg survey discovered that OPEC output fell by 900,000 bpd to a three-year low of 27.8 million bpd. Saudi Arabia led the decline, followed by Nigeria (130,000 bpd) and Libya (50,000 bpd). But these production cuts were offset by gains in Iraq (70,000 bpd), Angola (40,000 bpd), and the United Arab Emirates (20,000 bpd).
The latest developments sent oil prices higher. September West Texas Intermediate (WTI) crude advanced $2.05, or 2.6 percent, to end the Aug. 3 trading session on the New York Mercantile Exchange at $81.55 per barrel. Brent, the international benchmark for oil prices, also climbed $1.94, or 2.3 percent, to $85.14 per barrel on London’s ICE Futures exchange.
The State of Oil Markets
The crude oil rally took a breather midweek after Fitch Ratings downgraded the U.S. credit rating, spooking Wall Street investors.
A strengthening greenback also weighed on crude prices. The U.S. Dollar Index (DXY), a measurement of the buck against a basket of currencies, has strengthened in recent sessions, trading at around 102.50. A stronger greenback is bad for dollar-denominated commodities because it makes it more expensive for foreign investors to purchase.
Since the end of June, the substantial rally has been primarily driven by traders pricing in the global supply deficit in the second half of 2023. The United States is witnessing a tighter market that could worsen in the coming months, energy strategists warn.
According to the Energy Information Administration (EIA), domestic crude oil inventories cratered 17.049 million barrels for the week ending July 28. This was greater than the consensus estimate of a 1.367-million-barrel drawdown and represented the largest withdrawal since the EIA launched this series in 1982.
Other EIA data show that U.S. production has stalled at around 12.2 million bpd. The current administration has also failed to replenish national emergency stockpiles as the Strategic Petroleum Reserve (SPR) remains down 46 percent since February 2021 at 346.759 million barrels.
This has created a “volatile” situation for energy prices in the second half of the year, says Matthew Cunningham, an energy economist at Focus Economics.
“Energy prices will likely remain volatile ahead, but the bottom line is clear: Prices will be higher in H2 than in Q2, but remain lower than they were last year,” Mr. Cunningham wrote in a report. “Higher prices will be driven by a deficit in the crude market—which the EIA projects to last until at least H2 2024—caused by lower OPEC output and stronger demand in China and India.”
The latest developments and data have forced the market to abandon “its growth pessimism,” says Goldman Sachs Group Inc. analysts.
A growing number of market analysts are making end-of-year $90 forecasts for oil.
Higher oil prices also mean more pain at the pump for motorists. According to the American Automobile Association (AAA), the national average for a gallon of gasoline topped $3.82 on Aug. 3, up 8 percent from a month ago.
However, AAA spokesperson Andrew Gross noted that there could be relief on the way for drivers.
“Last month’s extreme heat played a role in the recent spike in gas prices due to some refineries pulling back, but now operations are getting back to normal,” he said in a report. “Coupled with tepid demand and declining oil prices, this may help take the steam out of the tight supply price jolts we’ve seen lately.”
The challenge for gas prices is that refinery utilization rates have not improved, notes Patrick De Haan, an analyst at Gas Buddy. In the last week, they slipped by 0.7 percent from the previous week. Aside from the east coast and Gulf Coast, utilization rates across the country eased.
“It’s important to note these percentages because the lower the utilization percentage, the lower output, which has a direct impact on local gasoline prices,” Mr. De Haan noted. “If refiners in your region have lower or falling utilization rates, you’re more likely to see gas prices rise.”
Year-to-date, gasoline prices have risen about 20 percent.