Oil Futures Rise as Supply Deficit Expected


Oil futures reached near 2023 highs on Friday, with forecasts confirming expectations of a significant supply deficit in the second half of the year.

Price Action

  • West Texas Intermediate crude for September delivery rose 32 cents, or 0.4%, to $83.14 a barrel on the New York Mercantile Exchange.
  • October Brent crude, the global benchmark, was up 37 cents, or 0.4%, at $86.77 a barrel on ICE Futures Europe.
  • September gasoline rose 0.5% to $2.92 a gallon, while September heating oil was up 0.5% at $3.17 a gallon.
  • September natural gas gained 1.8% to $2.814 per million British thermal units.

Market Drivers

WTI and Brent were poised for a seventh consecutive weekly rise. The International Energy Agency, in its monthly report released on Friday, stated that Saudi Arabia and Russia’s supply cuts would further tighten crude supplies in the coming months.

“The deepening OPEC+ supply cuts have intersected with improved macroeconomic sentiment and record-high world oil demand,” the report noted.

Oil Inventories Expected to Decline, Driving Prices Higher

The International Energy Agency (IEA) predicts that if the current targets of the oil-producing bloc are maintained, there could be a significant drawdown of oil inventories. The agency estimates a potential decrease of 2.2 million barrels a day in the third quarter of 2023, followed by a further decrease of 1.2 million barrels a day in the fourth quarter. This indicates a risk of driving prices even higher.

In addition, the IEA forecasts that oil supplies will rise by 1.5 million barrels a day next year, surpassing their previous estimate by 300,000 barrels a day. This increase in supply is expected to be driven by production enhancements in the United States, Brazil, and Guyana.

Recent market trends reflect this outlook, as both West Texas Intermediate (WTI) and Brent crude oil prices have reached their highest levels in months. WTI closed on Wednesday at its highest since November, while Brent finished at its highest since early January.

However, analysts at Sevens Report Research caution that while there has been an upside breakout from the 2023 trading range, WTI futures have become overbought on the daily timeframe. As a result, they anticipate some consolidation or a pullback towards the $80 level. Such a retreat should not be seen as surprising or alarming.

To confirm a new uptrend and dispel concerns of a temporary rally, these analysts emphasize the importance of surpassing recent price highs. They note that lingering worries about a potential recession continue to pose a significant challenge to the energy market.

Overall, with expectations of declining oil inventories and potential price increases, the oil industry remains dynamic and closely monitored.

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