WTI Oil Is Heading Towards $90.00

Key Insights

• OPEC+ will keep its production cuts in place until Brent oil settles in the $90.00 – $100.00 range. 
• Most likely, Fed will not be able to raise rates this year, which will be bullish for oil markets. 
• China’s stimulus measures should boost demand for oil.

The pullback in the oil markets turned out to be short-lived, and oil prices have recently touched new highs. WTI oil managed to climb above the $85.00 level, while Brent oil moved towards the psychologically important $90.00 level. It looks that traders have shrugged off recession risks and forgot about problems of China’s economy. What’s going on?

OPEC+ Wants To Push Prices Higher

OPEC+ has clearly learned from the mistakes of the past. The organization is not ready to boost production at the first signs of the uptick in oil prices.

Importantly, the two key players, Saudi Arabia and Russia, have major reasons to maintain their production cuts.

According to the IMF, Saudia Arabia needs an average oil price above the $80 level to balance its budget. Given the oil production cuts, the country likely needs a higher price, so the kingdom will likely try to push oil prices above the $90 level before it considers moving some production back into the market.

For Russia, the key problem is the oil price cap set by the Western countries. The cap limits Russia’s access to transportation and insurance. Thus, Russia benefits from selling less oil at higher prices above the cap and is interested in maintaining its production cuts for longer.

The Fed Will Be Less Hawkish Than Previously Expected

Traders expect that Fed will leave the federal funds rate unchanged this year. The recent comments from Fed speakers were mostly dovish, and it looks that Fed’s aggressive rate hikes put enough pressure on the economy and the labor market. If Treasury yields stay below their recent highs, oil markets may get more support.

Traders Hope That China Will Provide Enough Stimulus To The Economy

China’s economic performance in the first half of this year was disappointing. However, the country has started to implement various stimulus measures. Chinese stocks have already rebounded from August lows, so traders bet that these measures would provide enough support to the economy. In case China’s economy gets back to its normal growth, the country’s demand for energy will grow, which will be bullish for oil markets.

A combination of positive catalysts will likely push Brent oil towards the $95.00 – $100.00 level. WTI oil, which is trading at a discount to Brent oil, has a decent chance to settle above $90 in the upcoming weeks.

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