Oil Set to Rise for a Third Week on Tight Supply Outlook

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Oil prices are close to their highest levels since the end of last year, thanks to a tightening supply outlook in view of healthy demand. On Thursday, the Brent oil benchmark traded at just under $93 a barrel.

“Oil demand bounced back to pre-Covid levels quickly, but supply is having a tougher time in catching up,” said Joseph McMonigle, secretary general of the International Energy Forum.

“India and China combined will make up 2 million barrels a day of demand pick-up in the second half of this year,” the Secretary General said. 

Oil prices have soared recently after the Organization of the Petroleum Exporting Countries (OPEC) and its ally OPEC announced an extension of production cuts until the end of 2023. Experts believe the deficit could push oil prices higher than current levels.

Brent crude futures are trading above $92 per barrel, while US West Texas Intermediate (WTI) crude futures are trading above $89 per barrel. Both benchmarks are up by more than 2% this week.

The National Bureau’s data, which was made public on Friday, also revealed that the processing of oil at refineries reached a record 64.69 million tonnes in August, up 19.6 percent from a year earlier and equal to 15.23 million barrels per day (bpd).

“Even in cases where there is an overshoot in international crude oil prices, historical trends suggest that corrections are likely to follow,” CARE Ratings said.

“Given the circumstances, Brent Crude prices will likely maintain an average range between $87 and $92 per barrel for the remainder of the financial year unless unforeseen tail risks materialise,” CARE Ratings said.

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Analysts believe that oil prices could continue to rise in the coming weeks and months. However, they also caution that there are a number of downside risks, such as a recession in the global economy or a sharp increase in US oil production.

Reuters reported, quoting the International Energy Agency (IEA), that “oil output cuts which Saudi Arabia and Russia have extended to the end of 2023 will mean a substantial market deficit through the fourth quarter”.

OPEC+ started cutting output in 2022 to boost the oil market. As Reuters highlighted, this month, Brent Crude went above the $90 a barrel mark for the first time in 2023 after OPEC+ leaders Saudi Arabia and Russia extended their combined 1.3 million barrel per day (bpd) cuts until the end of 2023.

“Assuming India imports about 5 million bpd of oil, the full-year current account deficit will likely increase by approximately 20 basis points (bps). Consequently, CAD may increase to 1.8 per cent of GDP if the Indian crude basket averages about $90 per barrel for the remainder of the year,” CARE Ratings said.

The Opec-plus producer group has thus far committed to a total production cutback of 5.16 million bpd, or around 5% of daily world demand.

The second quarter of the US economy has seen higher growth than anticipated, dispelling concerns about a recession. Additionally, in the second quarter of 2023, the European economy resumed growth, while inflation in the area continued to decline.