Oil price surged and hit a new high for the year so far after Saudi Arabia and Russia the world’s biggest crude exporters said they would extend output cut by at least another three months.
Crude oil prices have hit a 9-month high on expectations of additional supply cuts by major oil producers like Saudi Arabia and Russia. The oil price surge was seen about 7 percent in the past week alone and about 25 percent so far this year. China’s signs of economic recovery have also given a boost to crude oil prices.
Why is oil surging?
Ole Hansen, head of commodity strategy at Saxo Bank, shared his insights on the oil price surge situation, “The cuts from Saudi Arabia and also from Russia are certainly the main driver for the sentiment right now. Also, the demand from China is not showing any signs of peaking at this point. So, the demand outlook remains strong as well.”
China’s economic activity has long been a bellwether for the global commodity markets, and crude oil is no exception. Jonathan Barratt, chief investment officer at Probis Securities, highlighted the importance of China’s role in shaping the crude oil landscape.
The moves by Saudi Arabia and Russia reinforce efforts by the alliance known as OPEC+ which includes members of the Organization of the Petroleum Exporting Countries and other producers to support spike in oil prices by agreeing to deep and prolonged production cuts.
As per an official source from the Saudi Ministry of Energy, the kingdom would extend its production cut of 1 million barrels per day until the end of December. The decision would be “reviewed monthly to consider deepening the cut or increasing production,” the source added.
The Saudi production cut which has been in place since July is the biggest in years and has depressed the kingdom’s output to nine million barrels per day. The cut is in addition to a reduction previously announced by Riyadh in April 2023, which extends until the end of December 2024.
Is oil price surge reviving inflation?
Saudi Arabia needs Brent crude to trade at around $81 a barrel in order to balance its budget, according to the International Monetary Fund. The kingdom slipped into a budget deficit this year for the first time in almost a decade.
Russia’s Deputy Prime Minister Alexander Novak said Tuesday the country would reduce its exports by 300,000 barrels per day through the end of 2023, also extending a previous commitment. Novak said the decision was taken “to maintain stability and balance” on oil markets, as per report.
Production cuts by OPEC+, which produces 40% of the world’s crude oil, have helped the spike in oil price higher in recent months. A development that could have repercussions for inflation and interest rates. Average U.S. gas prices have also drifted higher to $3.81 a gallon, a couple of cents above where they were this time last year.
“The recent upward trajectory in oil prices has laid the groundwork for potentially elevated [consumer price index] figures for August,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note Tuesday.
The impeding spike in oil price present a fresh challenge for central banks as they continue their diligent efforts to bring inflation levels back in line with their desired targets, he stated.
Market last update on crude price
Brent crude, the global benchmark, gained 1.8% to trade above $90 a barrel, while West Texas Intermediate (WTI), the US benchmark, rose by a similar margin to $87 a barrel.
Update on precious metal
This bullish sentiment in the crude oil market comes at a time when other commodities like gold and silver are experiencing mixed fortunes. While prices of both precious metals have recently reached one-month highs, they remain under pressure due to the strengthening of the US dollar index, which has climbed back above the 104 mark.
Over the past month, gold prices have declined by approximately half a percent, and silver prices have witnessed a more substantial drop of 5 percent.
