We remain positive on oil and hence continue to advise risk-taking investors to add long exposure via first-generation indexes or longer-dated Brent contracts, or to sell Brent’s downside price risks.
Saudi Arabia and Russia announced on Tuesday that they will extend their extra voluntary supply cuts until the end of the year. Saudi Arabia is curbing its production by an extra 1mbpd, and Russia is reducing its crude exports by 0.3mbpd. Statements from both countries said the cuts are reviewed on a monthly basis to decide whether to deepen or reduce them depending on market conditions. This policy flexibility allows Saudi Arabia to retain control of the oil market. Russia’s participation is also important, as the country is the second largest producer in the OPEC+ group and the deal ensures close coordination between the two producers.
We continue to think Saudi Arabia will reduce the cut only when it believes the oil market is stable enough to warrant it (i.e., when global oil inventories are lower than now). With OPEC+ focusing on a "precautious, proactive, and preemptive” approach, the group is likely closely monitoring incoming data from China, whose economic recovery remains a concern, and the impact aggressive monetary policy tightening may have on economic activity in Europe and the US.
With the production cut extended, we anticipate a market deficit of more than 1.5mbpd in 4Q23. So, with oil inventories set to fall further over the coming months, we expect Brent to rise to USD 95/bbl by year-end.
Main contributor - Giovanni Staunovo
Original report - Crude oil: Saudi Arabia and Russia extend cuts again, 5 September 2023.