Oil Rally Has More Room To Run

Key Insights

• Production cuts from key OPEC+ members will continue to support oil markets in 2023.
• The shrinking discount for Russia’s Urals oil shows that oil markets get tighter.
• U.S. has started to buy oil for the Strategic Petroleum Reserve, which is bullish for oil prices. 

Back at the beginning of August, I shared my views on why WTI oil was heading towards yearly highs. Currently, WTI oil settled near the $88.00 level, so it’s time to take another look at the situation in the oil markets.

Russia And Saudi Arabia Are Pushing Prices Higher

Voluntary production cuts from Saudi Arabia and Russia, which were extended until the end of the year, are the key positive catalysts for oil markets in the near term.

The leading members of OPEC+ have shown that they will provide sufficient support to oil prices. Most likely, production will be gradually increased in 2024 to avoid pushing too much oil back into the market.

U.S. domestic oil production is stuck near the 12.8 million bpd level, and it looks that higher prices are needed to provide enough incentives to raise production levels. In this situation, oil markets get tighter, which is bullish for oil prices.

Russia’s Urals Was Selling For $74 Per Barrel In August

Russia’s Ministry of Finance has recently noted that the price of Russia’s Urals oil averaged $74 per barrel in August. The oil price cap for Russia’s oil was set at $60 per barrel, but production cuts have pushed the prices of Urals above the cap.

At this point, there is no way to enforce the cap without pushing oil prices even higher. The price dynamics of Russia’s oil highlight the tightness of oil markets.

Obviously, all potential buyers would like to purchase Russia’s oil at the price of the cap, $60 per barrel. However, oil markets are tight so they have to compete for Russia’s oil, pushing its price higher. Of course, Urals is trading at a discount to Brent due to sanctions, logistical, and insurance problems, but this discount is falling due to rising demand.

U.S. Has Started Buying Oil For The Strategic Petroleum Reserve

The recent EIA reports have shown that U.S. has started buying oil for the strategic petroleum reserve.

The start of these purchases shows that U.S. officials do not think that oil markets will get back to yearly lows in the upcoming months.

The presence of another strong buyer in the market serves as an additional positive catalyst for oil markets.

For a look at all of today’s economic events, check out our economic calendar.