Oil prices in early Asian trading on Wednesday showed a slight uptick, building on the previous session’s 1% increase. Market sentiment is increasingly concerned about potential supply shortages after Saudi Arabia and Russia announced the extension of their voluntary supply cuts until the end of this year.
Brent Crude Gains: Brent crude futures rose by 14 cents, reaching $90.18 a barrel at 0215 GMT, signaling growing apprehensions about supply stability.
WTI Follows Suit: U.S. West Texas Intermediate (WTI) crude futures also saw an increase of 12 cents, with prices reaching $86.81 a barrel.
The decision by Saudi Arabia and Russia to extend their cuts for an unexpected three months has raised eyebrows in the oil market and is generating concerns about potential supply shortages.
Jorge Leon, Senior Vice President at consultancy Rystad Energy, remarked, “These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide.”
The impact of these cuts on inflation and economic policies in the West remains uncertain. However, higher oil prices are likely to increase the likelihood of further fiscal tightening, particularly in the U.S., to combat inflation.
According to Rystad Energy’s estimates, global liquids demand is expected to outstrip supply by approximately 2.7 million barrels per day (bpd) in the next quarter, emphasizing the current supply-demand imbalance.
Reflecting near-term supply concerns, the front-month Brent futures have reached nine-month highs, trading at $4.10 a barrel above prices for delivery in six months. Similarly, the spread between the front-month and six-month contracts for U.S. WTI futures widened to as much as $4.47 a barrel on Wednesday, also hovering near nine-month highs.
Saudi Arabia’s announcement to extend its voluntary oil output cut of 1 million bpd until the end of December 2023, along with Russia’s decision to reduce its oil exports by 300,000 bpd until the end of this year, has added to the supply uncertainty.
These voluntary cuts by Saudi Arabia and Russia are in addition to the April cuts agreed upon by several OPEC+ producers, which extend through the end of 2024. Both countries have committed to reviewing these cut decisions on a monthly basis to assess whether deeper cuts or production increases are needed based on market conditions.
As the oil market remains highly sensitive to supply dynamics and geopolitical factors, investors will closely monitor developments for their potential impacts on global energy prices and economic policies.