OPEC+ Supply Cuts, Falling Inventories, and Easing Economic Fears Paint a Bullish Crude Picture
The September ’23 WTI contract gained $3.51, or 4.4%, on the week to finish at $80.58/Bbl. Since the start of July, prices have risen nearly $9/Bbl, or 12.8%, fueled by supply cuts by Saudi Arabia and Russia driving expectations that the market is set to move into deficit in the second half in addition to easing fears of an economic slowdown.
The eight OPEC+ members pledged to cut 1.16 MMBbl/d from May and achieved a combined reduction of 1.06 MMBbl/d in June. After hovering just below its 9.98 MMBbl/d quota in June, Saudi Arabia is set to trim production to under 9 MMBbl/d for July and August as Riyadh extends its 1 MMBbl/d unilateral production cut. Furthermore, there’s speculation that Saudi may extend its cuts into September.
Russia cut oil exports in July to fulfill the OPEC+ pledge and intends to do so again in August, according to Energy Minister Nikolai Shulginov. This pledge led to Russian crude exports falling to 2.73 MMBbl/d in the week up to July 23, a notable 1.48 MMBbl/d drop from April's peak.
Expectations that the US Fed and ECB were at or near the end of their aggressive tightening cycle support the market sentiment. Both the Fed and ECB raised interest rates by a quarter-point this week, signaling that subsequent actions would rely on future economic data. Additionally, US GDP rose at a 2.4% annualized rate after a 2% pace in the past three months, beating analyst expectations for 2Q.
Meanwhile, expectations of demand outlook also improved as China committed to additional stimulus measures to bolster growth in the world's largest crude importer.
Signs of supply tightness are beginning to appear in the market, with the prompt WTI spread reaching its widest since November, i.e., 46c. Inventories at Cushing have dropped by 7.5 MMBbl/d over the past four weeks, pushing stock levels to their lowest since May and supporting the widening backwardation of WTI. These factors and extended supply cuts from the cartel reinforce our bullish outlook. We expect prices to rise as supply-demand dynamics indicate outsized inventory drawdowns, skewing the market 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.