Global oil benchmarks Brent and WTI are both currently trading above $90 per barrel hitting 10-month highs on tighter supply expectations and improved market fundamentals. Question on every commentators’ mind is whether a return $100 oil prices is imminent?
At 10:49am EDT on Friday (September 15, 2023), the Brent front month futures contract was up $0.088 or 0.09% to 93.78 per barrel, having briefly risen above $94, while the WTI was at $90.72 per barrel, up $0.56 or 0.62%.
Intraday levels on Friday follow a week of strengthening prices and are a marked contrast from the largely rangebound activity seen in August. After several weeks of oil prices oscillating around mid-$80 levels last month searching for a break out either way, bullishness returned in September as Saudi Arabia and Russia extended their combined oil production cuts of 1.3 million barrels per day (bpd) to the end of the year.
It prompted the International Energy Agency and other observers to predict a significant supply deficit for the fourth quarter of 2023. The agency expects global demand to be in the region of 2.2 million bpd in 2023 followed by a sharp decline to a growth rate of 1 million bpd in 2024.
But the Organization Of Petroleum Exporting Countries (OPEC) has offered much higher demand growth estimates of 2.44 million bpd and 2.25 million bpd for 2023 and 2024 respectively.
Much of the market sentiment last month was leaning in favour of rising crude supplies from Brazil, Guyana, Iran and the U.S. largely offsetting production cuts Saudi Arabia and Russia to meet existing demand, at a time of wider macroeconomic uncertainty, higher interest rates and the direction of China’s economy.
However, the rollover of Saudi-Russian cuts till the end of 2023 has materially altered market sentiment in the face of rising distillate demand, especially that of gasoline, diesel and jet fuel, as the Northern Hemisphere’s winter approaches.
So is crude oil heading towards $100 barring a massive deterioration in economic data? The quick and short answer is yes, especially for Brent, deemed to be the global proxy benchmark in the eyes of many.
However, on current trading volumes both Brent and WTI appear to be overbought, i.e. trading at levels above what many believe to be their fair value. Therefore a market correction is likely but not before Brent at the very least caps the $100 per barrel mark.
Saudi-Russian cuts are unlikely to overspill into 2024. It is why prices for Brent futures contracts 6-months out and beyond are at $90 and considerably lower at the moment, i.e. in backwardation, when the current price is higher than prices trading in the futures market further down the road.
So while higher prices, and even a return to $100 per barrel levels for Brent for the first time since Jul 2022 may be likely, don’t bet on them staying there in 2024.