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Higher Oil Prices Expected to Continue

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Andrew R. Michaud

• September 28, 2023

According to a survey of analysts, higher oil prices are predicted to persist as production cuts led by Saudi Arabia are anticipated to keep prices at elevated levels throughout 2024.

Surging Crude Oil Prices

In recent weeks, crude oil prices have experienced a significant surge due to supply constraints. The U.S. benchmark for crude oil prices, West Texas Intermediate, reached a 13-month high this week, surpassing $94 a barrel. Similarly, the international benchmark, Brent crude, traded at a comparable level.

Estimates for 2024

Based on the responses of 11 experts in a Wall Street Journal survey, it is projected that Brent crude will have an average price of $89.28 per barrel in 2024. In the same period, WTI is expected to average $85.33 per barrel. Furthermore, the survey indicates that Brent prices in the final quarter of this year will likely average $90.89, while WTI is projected to average $86.86. These figures suggest that policymakers will continue to face challenges in combating inflation.

Bucking the Trend

While many other commodities have been influenced by macroeconomic concerns and reduced demand from China, crude oil has proven to be an exception. WTI has experienced a 31% increase this quarter, while Brent is up by 24%.

The Impact of Supply Cuts on the Oil Market

The oil market has been significantly affected by the supply cuts from major producers Saudi Arabia and Russia. Both countries have announced an extension of these cuts until the end of the year. As a result, both OPEC and the IEA have predicted supply deficits for the year.

According to a recent note from UBS, refineries are now seeking alternative sources of oil, such as from the United States, due to the lower exports from OPEC+ and the high demand levels. This has led to an increase in prices, which was further supported by data showing falling oil inventories in Cushing, Oklahoma. Cushing is a crucial delivery hub for WTI, making this information an important indicator for the oil market.

UBS also highlighted that while U.S. crude exports have been high, this has resulted in lower crude inventories domestically. In fact, commercial crude inventories in the U.S. are currently at their lowest level since last December. Additionally, U.S. commercial inventories, including strategic reserves, have reached their lowest level since 1985.

The results of a recent survey indicate higher oil prices than what analysts were initially expecting. In August, the survey predicted Brent and WTI prices of $85.49 and $81.04 per barrel respectively for the year 2024. However, due to recent inventory drawdowns and extended supply cuts from OPEC+, the September survey suggests even higher prices.

Despite these projections, analysts at ING do not believe that these high prices will be sustained in the long term. They expect Brent to surpass $100 per barrel in the near future but anticipate downward pressure on prices due to macroeconomic concerns affecting demand.

Overall, the oil market remains volatile as a result of supply cuts and inventory drawdowns. While alternative sources of oil are being sought after, analysts remain cautious about the sustainability of high oil prices in the face of economic uncertainties.