Oil Prices Forecast: Inventory Concerns Rise as OPEC+ Extends Output Cuts

Highlights

• Crude oil prices fluctuate due to anxiety about potential supply shortages.
• Saudi Arabia and Russia extend voluntary supply reductions, surprising global markets.
• Bullish oil decisions set to drive global oil prices, as demand surpasses supply by 2.7 million bpd.

Mixed Performance for Crude Oil Amid Supply Concerns

Crude oil prices showcased a varied performance on Wednesday, notably after the previous session’s rise of over 1%. This shift arises from the market’s anxiety regarding a potential supply shortage. The backdrop for these concerns was set when Saudi Arabia and Russia took the unexpected step to prolong their voluntary supply reductions till year-end.

Unexpected Extension of Voluntary Cuts

The market had forecasted that both nations would continue their voluntary curtailments till October. However, the decision to stretch this period by another three months came as a surprise. Such bullish decisions have direct implications on the global oil market, invariably pushing the oil prices upwards. Moreover, Rystad estimates that the global demand for liquids will outstrip supply by about 2.7 million bpd in the upcoming quarter, further intensifying supply concerns.

Impacts on the Western Economy and Inflation

The repercussions of these production cuts on the Western economic landscape and inflation remain uncertain. Yet, an inevitable result of mounting oil prices is an increased chance of stricter fiscal measures, particularly in the U.S., to manage inflationary pressures. Reflecting these supply apprehensions, the front-month Brent futures are nearing 9-month peaks.

Details on the Supply Cut Extensions

Delving into specifics, Saudi Arabia has committed to extending its voluntary oil output curtailment of 1 million bpd for another three months till December 2023. Simultaneously, Russia has declared its intention to diminish its oil exports by 300,000 bpd till year-end. Both these voluntary reductions are additional to the previously agreed cuts by several OPEC+ producers set to last till the end of 2024. Saudi Arabia and Russia have also set provisions to review these decisions monthly to adapt to market dynamics.

Short-Term Forecast: Bullish

With the ongoing refinery maintenance season in the U.S. during September-October, a potential dampening demand for crude could put brakes on the escalating oil prices. Nevertheless, the predominant market sentiment leans bullish, especially with G7 shelving regular reviews of the Russian oil price cap scheme. This move is noteworthy given that most Russian crude is trading above the set limits due to the global crude price rally.

Technical Analysis

Light Crude Oil Futures on a 4-hour chart show the current price at $86.53, positioned above both the 200-4H moving average ($81.24) and the 50-4H moving average ($82.97). This suggests a prevailing bullish momentum. This interpretation is further solidified by the 14-4H RSI of 67.94, approaching overbought territory.

Although the market has retreated slightly from the previous 4-hour price of $86.63, it’s still within the main support area of $84.89 to $83.81 and below the main resistance area between $88.68 to $90.10. Overall, the current market sentiment leans bullish.