Brent oil price rises on tight supply expectations triggered by OPEC output cuts

Oil benchmark Brent crude maintained a position above $87 per barrel (bbl) on Friday, September 1, signaling a potential end to its two-week streak of declining prices. This upward trend is being driven by expectations of a reduction in oil supplies.

There is widespread anticipation in the markets that Saudi Arabia will extend its voluntary oil production cut of 1 million barrels per day (bpd) into October. This extension will prolong the supply constraints implemented by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively referred to as OPEC+, aimed at supporting and stabilizing oil prices.

Russia, the world's second-largest oil exporter, has already reached an agreement with OPEC+ partners to reduce oil exports. Deputy Prime Minister Alexander Novak confirmed the development on Thursday, but said the “main parameters” of the cut would be released next week. Russia has said separately that it would cut oil exports by 500,000 barrels per day, or around 5% of its output, in August and by 300,000 bpd in September.

In the United States, the most recent data revealed a significant drop in crude oil inventories, with a decline of 10.6 million barrels reported last week. This decrease far exceeded the earlier predictions of a 3.3 million barrel reduction.

However, a Reuters survey indicated that Iran's oil production increased to 3.1 million barrels per day (bpd) in August, reaching its highest level since 2018. This rise in Iranian production moved to offset the voluntary production cuts implemented by Saudi Arabia and Russia.

Investors are also maintaining a sense of caution due to signs of weakening demand, as evidenced by lackluster business activity data in major economies, which is casting uncertainty over the future outlook.

For the current week, the Brent crude oil price has risen by 3%, while U.S. West Texas Intermediate crude (WTI) has seen a 5% rise.

Brent crude prices: Further OPEC+ supply cuts expected

Markets.com Chief Market Analyst Neil Wilson commented on the developments in a recent overview:

“Oil cemented its weekly rally and pushed up to its highest since August 10th after Russia said OPEC+ had reached a fresh agreement to cut production. This built on a whopper of an inventory draw in the US which indicated robust demand ahead of the Labor Day weekend. Backwardation is steeper with the WTI six-month futures trading almost $4 below the front month, the steepest discount this year.”

A number of analysts voiced their doubts about OPEC oil supply returning to the global markets until prices elevate higher.

"We continue to expect (supply) cuts to be extended, with prices above US$90/bbl (on a sustained basis) required to draw OPEC supply back to market," National Australia Bank said in a client note cited by Reuters on Friday.

"With Brent prices having stalled in the mid-$80s ... the prospect of those Saudi barrels returning to the market any time soon looks slim and the impact is increasingly being felt across the world as commercial stock levels of crude and fuel products continue to drop," Ole Hansen, a Saxo Bank analyst, told Reuters.

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Brent oil price forecasts: Analysts see $90 mark as key point for OPEC+ supply return

On Wednesday, Barclays raised its Brent price forecast for 2024 by $8/bbl to $97/bbl as it expects the market to tighten further next year.

"Slowing non-OPEC+ supply growth, driven primarily by the US, and persistent underproduction from several OPEC+ producers due to structural constraints bolsters our core thesis behind a constructive view on oil prices," Barclays said in a note.

In its most recent short-term energy outlook, U.S. Energy Information Agency (EIA) revised its Brent crude price outlook for 2023 to $83 per barrel from $79/bbl (up 4.1% from its previous forecast) and elevated its Brent oil forecast for 2024 to $86/bbl, up from $84/bbl (a 3.6% change).

Economics data aggregator TradingEconomics anticipated that Brent crude oil could be priced at $87.11 per barrel as this quarter concludes. The platform’s projections, which are based on analyst opinions and global macro models, suggested that the Brent price could reach $94.41/bbl within the next 12 months.

When considering Brent crude futures for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.