Oil edges higher amid prospects of further supply cuts

Russia does not rule out extending its voluntary cut on crude exports until October, Deputy Prime Minister Alexander Novak says

Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman and Russia's Deputy Prime Minister Alexander Novak at a meeting in Saint Petersburg in June. Reuters
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Oil prices edged higher on Thursday as prospects of further supply cuts offset weak economic data from China.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.78 per cent higher at $86.53 a barrel at 4.25pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.77 per cent at $82.26 a barrel.

On Wednesday, Brent settled 0.43 per cent higher at $85.86 a barrel. WTI closed up 0.58 per cent at $81.63 a barrel.

“Crude oil has re-established some upside momentum after the early August correction ran out of steam before damaging the technical setup,” said Ole Hansen, head of commodity strategy, Saxo Bank.

“In the near term extended Opec+ production cuts will help support tight market balances but the combination of rising production spare capacity and worries about the economic outlook, may in our opinion still prevent prices from having a sustained move above $90,” Mr Hansen said.

Manufacturing activity in China, the world’s second-largest economy and top crude importer, contracted for the fifth straight month.

The official purchasing managers' index for China's manufacturing sector came in at 49.7 in August, up from 49.3 in July, according to the National Bureau of Statistics.

Scores above 50 denote expansion, while those below 50 indicate contraction.

The data underscores “the ongoing pressures on the Chinese economy amid a global slowdown”, Daniel Richards, Mena economist at Emirates NBD, said.

“The government has introduced new economic support measures this week, but they have been relatively mild to date, and it remains to be seen if they will be sufficient to boost the flagging economy,” he said.

China's post-coronavirus economic recovery has lost momentum. mainly due to a deepening property slump and weak consumer spending.

Meanwhile, analysts expect Saudi Arabia’s voluntary production cut of 1 million barrels per day to be extended into October.

“Given that supplies from other producers have picked up, particularly Iran and Venezuela, we and other market participants forecast that this voluntary production cut will continue at least for another month,” MUFG, Japan’s largest lender, said in a research note on Thursday.

“Overall, supply and demand balances are one thing, but translating this into a price forecast is a different matter,” the lender said.

MUFG has maintained its “range-bound” oil price forecasts, citing bearish risks such as robust oil supply and higher realised crude stocks in the Organisation for Economic Co-operation and Development countries.

Crude is prone to price gains amid a potential US Federal Reserve interest rate pause, slowing US economy, a weaker dollar and policy easing in China, the bank said.

Russia does not rule out extending its voluntary cut on crude exports until October, Deputy Prime Minister Alexander Novak was quoted as saying on Wednesday by state news agency Tass.

“We are currently monitoring the situation, estimating the market together with our colleagues from other countries. We will rely on the market’s requirements,” Mr Novak said.

Russia, which has pledged to reduce its production by 500,000 bpd until 2024-end, is expected to lower its exports by 300,000 bpd in September.

US crude inventories, an indicator of fuel demand, declined by 10.6 million barrels in the week ending on August 25, according to the US Energy Information Administration.

Analysts polled by Reuters were expecting a drop of 3.3 million barrels.

Petroleum inventories fell by 200,000 barrels last week, while distillate stocks increased by 1.2 million barrels, the EIA data showed.

Supply concerns were stoked by political instability in Gabon, an Opec member that produces about 200,000 bpd.

Military officers in the Central African nation led an armed takeover early on Wednesday morning and have named a new leader.

Updated: August 31, 2023, 12:35 PM