By Ole Hansen
KUWAIT: Crude oil prices rose on Tuesday after Saudi Arabia and Russia announced an extension to current production and export cuts to yearend. Brent crude oil traded above $90 for the first time since November while WTI, which in recent weeks has led the rally amid falling domestic crude stocks, touched $88 before running out of steam, partly due to the fact an extension was expected and was already partly priced in. We see the extension being driven by Saudi Arabia’s desire to keep stable to higher prices into a period where macroeconomic concerns continue to weigh and demand for crude oil slows as maintenance cuts refinery demand.
Not least in Saudi Arabia where refinery maintenance from October will cut capacity by 0.73 million barrels per day (Source: Energy Aspect) thereby leaving more crude oil available for exports into a period where overall demand is likely to slow past the peak summer travel season. OPEC’s production stood at 27.8 million barrels per day last month (Source: Bloomberg), a year-on-year decline of 1.8 million barrels per day and the lowest since October 2021 when global demand was still in a post-pandemic recovery phase.
During the same period, the estimated production capacity has held steady at around 34 million barrels per day, thereby lifting the available spare capacity above 6 million barrels per day. Rising spare capacity and rising crude oil prices rarely go hand in hand that well, and it highlights the fact that the current tightness is driven by political decisions, not because the world is running out of oil. Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals.
Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness. The fact that the strong momentum since July has not triggered a bigger appetite for crude oil exposure highlights the politically driven nature of the current tightness and the weakening macroeconomic backdrop. For now, tight market conditions are still on clear display through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both command a backwardation of around 65 cents per barrel, up from close to flat around the time Saudi production cuts were implemented.
While the upside in our opinion remains limited there is no doubt that the current production cuts will keep the oil market tight, thereby providing support for oil prices, but whether that support translates to stable or higher prices will depend on incoming macro-economic data, and with that the outlook for demand. From a technical perspective, Brent has been in a bullish uptrend since July and needs to hold support at $89 as a break may trigger long liquidation towards $87.5 from traders who bought the production cut extension news.
In addition, the RSI is showing divergence ie the uptrend is stretched short-term. However, the medium-term uptrend is still firm with trendline support currently at $84.25, potentially being the bottom of a new higher range supported by OPEC’s active management of supply. We do not join the $100 per barrel camp but will not rule out a relatively short period where Brent could trade above $90.
Note: Ole Hansen, Head of Commodity Strategy, Saxo Bank