From Mark's desk: Is the financial market back in balance? (5:01)
A quick video on our latest positioning and views, direct from Chief Investment Officer Mark Haefele.

Thought of the day

The price of Brent crude has reached USD 95/bbl, the highest level since November 2022, amid further evidence of a tightening oil market. It is set to remain undersupplied into the final quarter of 2023, due to solid oil demand and lower production from Saudi Arabia and other OPEC+ member states. That's according to recent reports from top energy agencies, including OPEC's Secretariat along with the International Energy Agency and the US Energy Information Administration.

Our base case is that the oil price will not move past USD 100 a barrel (bbl) on a sustained basis over the next 12 months, since that would likely result in step up in production from US oil producers as well as weaken demand growth next year.

But, we do believe strong fundamentals will support Brent around current levels, within a range of USD 90–100/bbl over the coming months.

Top producers have extended supply cuts and global inventories are falling. Saudi Arabia and Russia announced on 5 September 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. Both countries will review their voluntary cuts on a monthly basis and, if changes in market fundamentals warrant it, they could cut or add production. Meanwhile, US oil production growth is likely to slow down as result of lower drilling activity in recent months.

Global visible oil inventories (crude and refined products) fell sharply by 76.3 million barrels (mb) in August and are now standing at the lowest level since July 2022, according to the International Energy Agency.

Demand remains solid. Global oil demand stands at a record 103 million barrels a day, having benefited from the reopening of China and solid demand growth in India, the second- and third-largest oil consumers, respectively. Although we expect the rise in demand to slow back to the long-term growth rate of around 1.2 mbpd in 2024, demand will continue to rise, in our view.

This week, Saudi energy minister Prince Abdulaziz bin Salman al Saud said the jury is still out on the outlook for Chinese oil demand, European growth, and what central bankers will do next. His comments suggest that Saudi Arabia will only increase supplies when it believes the oil market is sufficiently stable to warrant this move, including when global oil inventories are lower than at present. 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. Based on the current demand/supply situation, we anticipate a market deficit of more than 1.5mbpd in the fourth quarter of this year.

Financial investors are adding exposure, providing an additional support for prices. A tightening oil market and higher roll returns from backwardation is likely drawing investors to crude oil. Brent’s six-month contract is about USD 5/bbl cheaper than the first-month contract versus USD 0–1/bbl during the first half of 2023. This backwardation structure can benefit investors as they roll one contract to the next.

So, we believe oil can sustain its rally, which has taken Brent roughly 30% higher since the recent low in late June. We retain our year-end target of USD 95/bbl. We reiterate our recommendations for risk-taking investors to add long exposure via longer-dated Brent contracts, or to sell Brent’s downside price risks. We also like energy equities in our global strategy.