Oil prices hit 9-month highs as crude supplies tighten

Both benchmarks surged this week after Saudi Arabia and Russia said they would extend supply cuts

Pump jacks at shale oilfields in Argentina. The International Energy Agency expects demand to expand by 2.2 million bpd this year. Reuters

Oil prices settled higher on Friday to hit nine-month highs and post a second straight weekly gain as tightening crude supplies helped offset concerns about China's economy.

Brent, the benchmark for two thirds of the world’s oil, rose 0.81 per cent to close at $90.65 a barrel. West Texas Intermediate, the gauge that tracks US crude, was up 0.74 per cent to settle at $87.51 a barrel.

Both benchmarks were up about 2 per cent for the week.

“Energy traders are overthinking the recent rally as the global market supply deficit will easily remain despite some of the soft data points we are seeing across Asia and Europe,” said Edward Moya, senior market analyst at Oanda.

“Oil is overbought but then again, so is the US dollar. The oil price rally might be able to extend if optimism grows that China has found a bottom,” Mr Moya said.

Both benchmarks surged to 10-month highs this week after Saudi Arabia and Russia said they would extend supply cuts of a combined 1.3 million barrels per day to the end of the year.

As part of their voluntary cuts, the kingdom is extending its one million bpd output reduction until December, while Russia is rolling over its export cut of 300,000 bpd until the end of the year.

“We do not view this move to be read [in the] market as Opec+ cutting to offset a weaker prevailing demand outlook,” MUFG, Japan’s largest lender, said in a research note on Thursday.

“Rather, it aims to reduce the excess in global inventories, mitigate downside volatility in the oil price and should be viewed as supportive to investment by the sector, given the supply-constrained expectations this decade.”

MUFG maintained its Brent crude target of $84 a barrel and $87 a barrel for the end of 2023 and 2024, respectively, with a surge back north of $100 a barrel.

The International Energy Agency expects demand to expand by a record 2.2 million bpd this year, supported by a recovery in China’s economy.

However, the Asian country's post-coronavirus economic recovery has lost momentum mainly due to a deepening property slump and weak consumer spending.

China has announced a string of stimulus measures over the past few weeks, including halving the stamp duty on stock transactions and easing mortgage rates.

The country’s overall exports fell 8.8 per cent year on year in August while imports recorded a 7.3 per cent drop, customs data showed on Thursday.

Meanwhile, US crude stocks, an indicator of fuel demand, fell by 6.3 million barrels in the week that ended on September 1, according to the US Energy Information Administration.

Analysts polled by Reuters were expecting a drop of 2.1 million barrels.

Petroleum inventories decreased by 2.7 million barrels last week while distillate stocks rose by 700,000 barrels, the EIA data showed.

A strong dollar has been weighing on oil futures.

The US Dollar Index, a measure of its value against a weighted basket of major currencies, jumped to a six-month high of 105.03 on Wednesday on positive US services sector data. It is currently down 0.17 per cent at 104.88.

A stronger greenback makes dollar-denominated oil more expensive for holders of other currencies.

Updated: September 10, 2023, 9:22 AM