Will Crude Oil Soar Again?

Commodity

Summary:

Crude oil retraced to 77.5. In the context of production cuts, concerns about a gap between supply and demand stimulated oil prices higher. So, oil prices are about to soar? Currently, the market is almost completely bullish. However, we need to stay rational moderately.

After Saudi Arabia and Russia greatly exceeded market expectations yesterday to claim to extend their production cuts until the end of the year, oil prices soared again, and the European and American markets rose rapidly to 87.5. The market is generally optimistic that oil prices will rise above the previous high of 93 as a gap is expected between supply and demand at the end of the year. However, what I would say is that the market is full of uncertainties. Therefore, we should be bullish, but avoid going long blindly. In this situation, it is difficult for oil prices to break through the previous high of 93 again merely based on expectations alone. The premise of the breakthrough is a fundamental positive stimulus, that is, the impetus of improved demand. As the supply side has reached its pushing limit if the demand side fails to keep up, then this bullish trend will probably come to an end. However, the pullback of oil prices yesterday may also indicate the market fears of being so high.

Let's start by reviewing yesterday's news. The "additional production cuts" of Saudi Arabia and Russia began in July 2023. The cuts were originally scheduled for a month but have been extended twice until the end of September. The three-month extension this time exceeded market expectations. Perhaps the market was not surprised by this, as this was the case in both early July and early August. July was the first time that production cuts were extended, and the market responded as it should. Oil prices smoothly rose for a month. However, for the August extension, the price increase only lasted until August 10, when there was a deep correction. Well, it is now the third extension of the production cuts, for 3 months unexpectedly. What kind of story will there be? Perhaps history is always strikingly similar.

From the perspective of OPEC+ producers, larger production cuts will help stabilize oil prices and thus maintain a balanced budget. Their determination is also unquestionable because it supports the ambitious spending projects of Mohammed Bin Salman, Saudi Crown Prince. Also, the "protracted" Russia-Ukraine conflict requires a stable oil price. The question is, will this strategy of "high price replacing high volume" drive oil prices to new highs?

There are several aspects we should notice about. On one hand, the oil production of Iran in August has returned to its record high in five years, with approximately over 3 million barrels per day, which has largely diminished the effect of the cuts. Saudi Arabia's further additional production cuts have brought its total crude oil production to about 9 million b/d from a historical peak of 12 million b/d. According to the monthly report released by the Saudi central bank last week, its foreign exchange reserves fell by more than $16 billion to about $407 billion, the lowest level since the end of 2009. Although there is a determination to reduce production, the space for further production reduction is extremely limited. Perhaps after the stabilization of oil prices, they will withdraw production cuts gradually.

On the one hand, one of the important factors in extending additional production cuts is that China's economic recovery is still worse than expected. China, the world's largest oil consumer, has launched a package of easing measures since August to stimulate the economy, and markets are betting that its recovery will be further delayed until the fourth quarter. At the same time, the global recession fears have not completely dissipated. Judging from the economic data of Europe and the US in August, the economic situation is not optimistic. Therefore, the market generally predicts a slowdown pattern in the fourth quarter in Europe and the US.

Personally, I reckon the extended production cuts are a response to the sluggish demand, which is a salvation to oil prices, not an icing on the cake. At the same time, it will also limit the rise in oil prices. Therefore, investors need to be wary of the possibility of profit-taking by bulls in the short term.

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Will Crude Oil Soar Again?

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