Oil steadies after multi-month high amid tight market supply

Brent broke losing streak last week with 4.8 per cent gain

Drilling rigs operate in Midland, Texas. Brent has gained about 3 per cent, while WTI has risen more than 6.6 per cent since the beginning of this year. Reuters
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Oil prices stabilised on Monday after hitting a multi-month high, buoyed by expectations of further tightening amid continued supply cuts by Opec+ producers and a US jobs report that strengthened the prospect of a pause in interest rate increases.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.06 per cent higher at $88.63 a barrel at 2.01pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, edged 0.07 per cent higher to $85.61 a barrel.

Brent gained 4.8 per cent for the week, the most since late July. It also broke a two-week losing streak last week. WTI added 7.2 per cent, the highest since March, in its weekly rally.

Both benchmarks have bounced back from their June lows with Brent adding about 3 per cent and WTI advancing more than 6.6 per cent since the beginning of the year.

The output cut by the Opec+ group of oil producers has bolstered prices and tightened market conditions.

Saudi Arabia, Opec’s top oil producer, is widely expected to extend its voluntary production cut of one million barrels per day into October.

Russia, the world’s second-largest oil exporter, which sets the tone of global oil supply along with Riyadh, is on board with its Opec+ partners to continue its export caps, Russian Deputy Prime Minister Alexander Novak said on Thursday.

“The barrel of US crude traded past $86 per barrel, as oil bulls continued buying the tight supply narrative from Opec+,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Saudi Arabia’s crude exports stood at 5.47 million barrels per day in the first 27 days of August, the lowest level since April 2021, UBS said last week, quoting Petro-Logistics data.

The Swiss lender remains bullish on prospects of oil continuing its march higher, predicting Brent will rise to $95 a barrel by the end of this year.

MUFG, Japan’s largest lender, expects Riyadh’s production cut to continue “at least for another month” as Iran and Venezuela increase exports.

However, even if Iranian sanctions were to be eased, there’s not necessarily going to be a huge bump in the country's exports, Vitol Group chief executive Russell Hardy told Bloomberg.

Oil prices have also responded positively to Friday's US job market report.

US employers added 187,000 jobs in August, more than expected, but underlying numbers point to expectations that the Federal Reserve could be finished with raising interest rates.

The employment data is positive news for the Fed, which has raised interest rates 11 times since March 2022 to bring inflation down to its 2 per cent target range.

“Data for August provided further confirmation that the US labour market is softening,” said Khatija Haque, head of research and chief economist at Emirates NBD.

“Perhaps most relevant for the Fed is average hourly earnings growth which slowed to 0.2 per cent month-on-month from 0.4 per cent month-on-month in July, the smallest rise since February 2022.”

Oil prices have seen large swings this year, driven down in March by worries of a global banking crisis and fears of recession in US amid consistent rate hikes.

There have been several contributing factors that sent crude prices higher. The biggest among them was “renewed attention on Opec/non-Opec efforts to continue tightening supply, even as global oil stocks have been declining”, Vanda Insights said in its latest Oil Views letter.

“As economic worries (alternating with optimism) occupied centre-stage for the oil complex over most of the recent months, a crucial shift that remained below the radar was Opec+ going from defending a $70 per barrel crude floor with its output cuts (in the aftermath of the March banking crisis) to keeping prices propped up at the current, much higher levels.”

However, looking at crude’s “impressive rally”, the relative strength index – a measure that indicates price momentum – now warns that oil has stepped into the “overbought market conditions”, said Ms Ozkardeskaya.

“We shall see a minor correction in oil prices this week, before an eventual push towards the $89-$90 per barrel area,” she added.

Updated: September 04, 2023, 10:14 AM