The rally in oil prices shows no sign of slowing down. For consumers looking to fill up at their local gas stations, the horizon is grim
The latest figures from the International Energy Agency (IEA) have confirmed what many industry insiders were anticipating: global oil demand touched an all-time high in June and is poised to peak once again in August. World oil demand soared to a record 103 million barrels per day (bpd) in June, and projections for 2023 anticipate a demand hovering around 102.2 million bpd.
Yet, this surge in demand tells only half the story. The underlying dynamics of the global oil market are hinting at a larger, looming challenge. With supply chains tightening and global inventory levels dipping, the trajectory toward escalating oil prices seems inevitable. It’s no wonder experts are bracing for a bull run.
Saudi Arabia and Russia, the oil titans of the world, are intensifying this trajectory. They’re strategically cutting output, a move designed to bolster market prices. The Saudis, for instance, have recently announced they’ll be continuing with their one bpd crude output cut into September, hinting at possibly extending it even further. In tandem, Russia has also pledged to reduce its crude output by 300,000 bpd in the coming month. This is on top of the existing output quotas set by the OPEC+ alliance.
Complicating matters further, nations like Nigeria and Angola have underproduced against their OPEC quotas, with Nigeria facing issues at its Forcados terminal due to leak risks and Libya again seeing a disruption in its output. Such events make the job of OPEC+ a tad bit easier.
The numbers are telling. July witnessed a surge in oil prices by about 12 percent, reaching US$83 a barrel. This has been music to the ears of countries like Saudi Arabia and Russia, which rely heavily on oil revenues. While the International Monetary Fund maintains that Riyadh would need oil prices to hover around US$81 a barrel, there are speculations that Saudi might require up to a whopping US$100 a barrel to keep its fiscal house in order. Russia, concurrently, requires this boost in oil revenue to finance its ongoing engagements in Ukraine.
Despite these supply restrictions, global demand remains resilient. Russian Deputy Prime Minister Alexander Novak, after an OPEC+ ministerial panel meeting, expressed the opinion that global oil consumption might surge by 2.4 million bpd this year. The IEA itself forecasts a potential supply tightness of around 1.7 million bpd in the latter half of 2023.
This sentiment is echoed by analysts worldwide. “With the (Saudi and Russian) production cut extended, we anticipate a market deficit of more than 1.5 million bpd in September, following an estimated deficit of around two million bpd in July and August,” according to UBS analysts.
Standard Chartered’s model is even more pessimistic, foreseeing a supply deficit of 2.81 million bpd in August, escalating further in the subsequent months. Such shortages are anticipated to push global oil inventories down by staggering amounts, nudging oil prices upwards. Its analysts also project that global inventories will fall by 310 million barrels by end-2023 and another 94 million barrels in the first quarter of 2024. ‘This would keep oil markets backwardated and push oil prices higher,’ Alex Kimani said in his piece on Oilprice.com. Consequently, oil prices have been projected to climb to US$93/barrel in Q4.
American consumers are already feeling the pinch. U.S. gasoline stockpiles diminished by 2.7 million barrels recently, and distillate inventories dropped by 1.7 million barrels. Such decreases in inventory, especially during peak travel season, undoubtedly play a role in the climbing oil prices.
Essentially, the rally in oil prices shows no sign of slowing down. Prices are expected to shoot past the US$90 mark, with some even predicting it might touch the elusive US$100/barrel. The global demand scenario and the persistence of output cuts will be the determining factors.
For consumers, particularly those filling up at their local gas stations, the horizon seems grim. Bracing for higher costs appears to be the only prudent move. The game of supply and demand in the oil market is in full swing, and it’s the consumers who might end up bearing the brunt.
Stay vigilant and prepared.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
For interview requests, click here.
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