A recent report predicted that oil prices would continue to rise in the second half of this year (2023), after it recorded its highest level since mid-April 2023, supported by the recent OPEC+ production cuts, and some unplanned production outages.
The report – issued by the Swiss investment bank “UBS” – stated that the market witnessed a deficit of 0.7 million barrels per day in June, and the deficit will reach about 2 million barrels per day in this July and next August.
The authors of the report – of which the specialized energy platform obtained a copy – confirmed that Saudi Arabia’s decision on whether to extend the voluntary production cut by one million barrels per day for an additional month in September will result in more supply shortages in the market.
Factors of high oil prices
The report indicated that the recent rise in oil prices was mainly driven by the voluntary OPEC+ production cuts announced in April and implemented in May.
Some temporary outages in production also helped tighten supplies in the oil market, such as an oil rig fire in Mexico, power outages and unscheduled maintenance in Kazakhstan, an oil spill at an export terminal in Nigeria, and production shutdowns by protesters in Libya.
“In the coming months, oil markets should witness even more tight supply as the voluntary additional cut in Saudi oil production by one million barrels per day for two months goes into effect,” said Giovanni Stanovo, a commodities analyst at Swiss investment bank UBS, who co-authored the report. July and August into force.
He added, “With demand growing at a strong pace, the continuous removal of barrels is gradually pushing oil prices higher.”
The Swiss Investment Bank report indicated that demand for oil remains strong at above 102 million barrels per day, despite recession fears, and is set to reach 103 million barrels per day in August for the first time.
Demand growth continues to be driven by Asia, with China and India accounting for the most, and demand from Brazil and the Middle East is also strong, according to the specialist energy platform.
The following chart – prepared by the specialized energy platform – shows OPEC’s expectations for global oil demand growth in 2024:
OPEC+ exports are at their lowest levels
OPEC + production has decreased since the decision of some coalition countries in April to remove barrels from the market starting in May 2023, and the group’s crude oil production recorded its lowest level in a year in June.
Production in July is likely to drop significantly; Due to the additional voluntary reduction in Saudi oil production, and production outages in other member states.
The oil export data indicated that OPEC’s crude exports decreased by more than 1.1 million barrels per day in the first 23 days of July, compared to June levels.
OPEC+ exports also fell by more than 0.6 million barrels per day in the first 21 days of July versus June, driven by lower oil exports from Russia, which fell by about 0.5 million barrels per day, according to Petro-Logistics.
The Swiss Investment Bank report, a copy of which was obtained by the energy platform, predicted that full exports for the month of July might decline slightly, after Libyan production rebounded following the end of the protests.
The decline in exports has begun to reduce floating oil stocks, which consist of oil in transit on tankers and oil stored in floating stocks.
Moreover, as a result of additional Saudi production cuts and higher official selling prices for Saudi barrels, refineries in the Atlantic Basin are looking for replacement barrels in the North Sea, North and South America.
It is assumed that the decline in Russian oil exports will continue in August, which will also help in tight supplies in the oil market.
Supply deficit forecasts and oil prices
The report projects a market deficit of 0.7 million barrels per day in June, and around 2 million barrels per day in July and August, with oil prices rising once this shortfall in onshore oil stocks becomes apparent.
The size of the market deficit in September will depend, among other factors, on whether the additional Saudi production cut of 1 million barrels per day is extended into September, which will be set in the first week of August, according to the report.
Back in 2021, the voluntary production cut of 1 million barrels per day was in place for 3 months, followed by a reduction of 0.5 million barrels per day in the fourth month.
And if the Saudi voluntary cut is extended, it is likely that this will cause another deficit in September of more than 1.5 million barrels per day, and if this cut is halved, this deficit will remain more than one million barrels per day.
If these projections are correct, onshore oil inventories should decline over the coming weeks, as onshore oil inventories have not yet begun to decline on a sustainable basis, and the decline is only visible in floating stocks.
Onshore and floating inventories are expected to show a decline in the coming weeks and months, hence the authors of the report maintain a positive outlook for oil prices.
Brent crude is expected to move to the range of $85-90 per barrel, and WTI to move to the range of $80-85 per barrel, for the remainder of 2023.
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2023-07-27 16:35:23
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