Global Oil Supply Shows Signs of Tightening as OPEC+ Cuts Begin to Bite
The September ’23 WTI contract gained $1.65, or 2%, on the week to finish at $77.07/Bbl. Since the start of July, prices have risen nearly $6/Bbl, or 8.6%, as supply cuts by Saudi Arabia and Russia started taking effect, driving expectations that the market is set to move into deficit in the second half.
Saudi Arabia's crude oil exports fell by 0.39 MMBbl/d to 6.93 MMBbl/d in May, as production dropped by 0.5 MMBbl/d to 9.6 MMBbl/d in line with its OPEC+ pledge. An additional cut of 1 MMBbl/d is planned for July and August.
Seaborne Russian crude exports for the week ending July 16 plummeted to a six-month low of 3.1 MMBbl/d, down 0.78 MMBbl/d from May's peak and 0.27 MMBbl/d below February's baseline. Russia plans to reduce crude exports by 0.5 MMBbl/d in August.
Fears that global central banks' interest rate hikes might trigger an economic downturn alongside a sluggish recovery in China have kept crude prices range-bound. Despite initiatives like interest rate cuts and easier credit access, China's attempts to revive its economy have seen limited success. However, a recent pledge to enhance private business conditions offered some optimism.
The Fed’s aggressive monetary policy continues to weigh on the demand outlook as the market anticipates another interest-rate increase this month.
The WTI prompt spread has moved into backwardation for the first time since May, signaling a tighter market. An inverted curve, coupled with extended supply cuts from the cartel, supports our bullish outlook. We expect prices to rise as supply-demand dynamics indicate significant inventory drawdowns. With OECD industry stocks still 84 MMBbl below the five-year average and IEA forecasting crude demand to outstrip supply by 2 MMBbl/d in the second half of 2023, we expect the market to be skewed more to the upside.
AEGIS recommends costless collars for adding oil hedges, allowing for upside potential in line with our bullish outlook. Given each portfolio’s unique needs and risks, we encourage you to consult your strategist to identify your most suitable strategies.