In a Friday surge, oil prices gained momentum, fueled by market expectations of a forthcoming decrease in crude stockpiles.

At the time of writing, October futures for Brent crude oil surged by 1.01%, soaring to $84.23 per barrel. Simultaneously, October WTI futures experienced a 0.81% leap, reaching $79.69. Earlier in the day, the ascent of oil prices was marked by a more measured tempo.

The ascension of Brent crude has sustained a moderate upward trajectory, spanning nearly two months. This ascendancy was set into motion by Saudi Arabia's declaration of voluntary production cuts, precisely coinciding with the commencement of the peak demand period for fuel. At present, industry analysts are sounding an alarm, stirring discourse over an impending supply shortfall. Amidst this discourse, financial luminaries and analytical entities are postulating that the benchmark Brent crude may potentially see a trading range of $90 per barrel, and potentially even surpass this threshold, during the latter half of the year.

Saudi Arabia

Arguably, the primary catalyst behind the surge in black gold prices has been the voluntary supplementary production cuts undertaken by Saudi Arabia. The Kingdom opted to curtail oil production by 1 million barrels per day, starting from July, slightly surpassing the 9 million mark. Concurrently, the Saudis are committed to sustaining this level at a minimum through the end of September.

Starting August, Russia decided to join Saudi Arabia's efforts, announcing a reduction in oil exports by 500,000 barrels per day for the last month of summer, followed by a 300,000-barrel cut in September. Notably, Russian officials didn't specify the duration of these reductions.

Evidently, such decisions by the major oil exporters are endeavors to prop up oil prices, inching them closer to the $100 per barrel mark. Yet, despite a combined volume of unrealized crude deliveries reaching nearly 1.6 million barrels per day, this target still remains elusive.

Perhaps, playing into this situation is the fact that independent oil producers markedly ramped up their oil shipments to the global market. Consequently, production outside of OPEC surged by 2.1 million barrels per day, to some extent offsetting the cartel's output reductions.

The oil market is plagued by uncertainty, a sentiment stoked by the high likelihood of further cutbacks. Ostensibly, Saudi Arabia is expected to increase its crude oil production by 1 million barrels per day starting October, but certainty in this regard remains elusive. The Saudis adhere to the principle that the price of crude holds far more precedence than its quantity.

China

China is striving to reignite its former economic growth following the lifting of quarantine restrictions. Presently, China stands as nearly a primary driver of the global energy market. According to international credit rating agencies, a substantial portion of the projected oil demand growth for 2023 hinges on this country. Current projections suggest that China's demand growth will hover around 2.3 million barrels per day.

China actively procured oil during the first half of the year, much to the delight of its producers. Oil imports to China escalated by 11.7% over this period (reaching 282.1 million tons). Concurrently, China's expenditures were 10.9% lower compared to the same period the previous year.

The state of China's economy holds near-primary significance for the oil market, rendering it incredibly sensitive to any negative impulses. For instance, in July, Brent crude prices managed to reverse course due to news that China's oil imports had decreased by 16% compared to June – ultimately marking the lowest figure since January. This "pause" in deliveries could well have been influenced by the country tapping into its own oil reserves, which, according to the EIA, surged by 47.8 million barrels in the first half of the year.

What's about the shortage?

OPEC+ alliance's proclaimed cuts since October of last year tally a sizable 4 million barrels per day. Yet, these figures exist largely on paper, as the actual production levels have probably tapered by 2.6 million barrels over the same period. Simultaneously, a surge in oil demand exceeding 2 million barrels per day is anticipated this year.

Comparative to last year, this uptick in demand could potentially be even more pronounced due to market consumption seasonality. Factoring this in, discussions transcend mere supply deficit in the global market this year, hinting at its amplification during H2.

Supply scarcity derives from oil reserves in developed nations hovering at a near-decade low, accounting for approximately 85 days of consumption – a situation that precludes sales from stockpiles to stave off shortage.

With a likelihood that Brent crude could ascend to $120 per barrel in 2Q 2024, OPEC+ will likely nullify some of the voluntary production cut measures put in place by oil-producing nations. For now, the cartel refrains from interference; the 1.66 million barrel per day constraints (embraced by 9 countries including Russia since May) are poised to extend until the close of the following year.

Currently, the global oil market grapples with a daily shortfall of approximately 1.5 million barrels. Expert perspectives anticipate this supply deficit to shrink to 1 million barrels by year-end. The present demand-supply imbalance fluctuates within the range of 0.5 to 0.6 million barrels per day. While this disparity could narrow down to 0.2 to 0.3 million barrels by year-end.

Should China's economy experience sluggish growth while elevated oil prices persist, this could curtail the behemoth importer's procurement. With elevated oil prices, Chinese refineries may tap into accumulated reserves to avoid straining the nation's resources via imports in upcoming months. If this materializes, market projections of robust oil demand in China's H2 could fizzle. Consequently, oil prices soaring beyond $90 per barrel might remain a pipe dream.

Beyond China's quandary, oil prices are also susceptible to amplified production by sanctions-laden Libya and Iran. Further compounding this are apprehensions surrounding the deteriorating US economic scenario, potentially compelling the Federal Reserve into a fresh cycle of rate hikes.