Commodities Flash

  • Sep 06, 2023

Saudi Arabia and Russia extend production cuts into year-end, with USD100/b oil back on the table

  • Saudi Arabia and Russia have announced extensions of voluntary production/exports cuts for three months until end of 2023. As markets did not fully price in this move, Brent crude has rallied 2-3% to slightly north of USD90/b – first time since November 2022. Our reading of this development is that OPEC+ is categorically exercising, in today’s underinvested environment (see here), its inelastic pricing power – that is, its ability to raise prices incrementally without significantly hampering its demand.
  • With Brent now lodged ~USD90/b and US WTI not too far behind at ~USD87/b, oil option traders are showing growing faith that the market’s tightness can last, bolstering wagers that Brent crude will rally up towards USD100/b once again – open interest on USD100/b calls is the most held strike over the next 12 months.
  • Whilst the gravitational tilt is to the upside, given tight market fundamentals, we however maintain our year-end 2023 and 2024 Brent crude target of USD84/b and USD87/b, respectively, with a surge back north of USD100/b not our base case scenario. This is premised on the view that OPEC+ is unlikely to entertain triple digit oil prices for three reasons:
    • The group’s resolute medium-term stability mandate and reinforces backwardation, whilst concurrently aiming to claw back investors who have pivoted to USD cash allocation following aggressive Fed hikes.
    • Elevated oil prices could spur robust US and sanctioned producers supply responses, akin to the 2022 energy crunch.
    • US gasoline prices are now at the highest seasonal level in more than a decade, even as the Labour Day holiday marked the end of the US summer driving season, and the political importance of gasoline prices and real incomes in the run up to the US presidential elections translates into a challenge to President Biden’s re-election efforts.
  • What is clear is that the aggressive supply management from OPEC+ risks fanning the flames of global inflation at a time when developed market central banks, led by the Fed, are nearing the end of their rate hiking cycle.