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Saudi Arabia and Russia Extend Oil Output Cuts Until End of 2023, Increasing Concerns of Market Deficit

International Energy Agency Predicts Supply Shortfall in Q4; China’s Role Remains a Wild Card in Global Oil Demand

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Oil output cuts extended by Saudi Arabia and Russia until the end of 2023 are expected to lead to a substantial market deficit in the fourth quarter, according to the International Energy Agency (IEA).

This move comes as the IEA largely maintains its estimates for demand growth in 2023 and 2024.

OPEC and its allies, collectively known as OPEC+, initiated supply restrictions in 2022 to stabilize the oil market.

Brent crude, against which the Nigerian oil is priced, surpassed $90 per barrel for the first time this year after OPEC+ leaders, Saudi Arabia and Russia, extended their joint cuts of 1.3 million barrels per day (bpd) until the end of 2023.

Output reductions by OPEC+ members, amounting to over 2.5 million bpd since the beginning of 2023, have thus far been compensated by increased supplies from producers outside the alliance, including the United States, Brazil, and still under-sanctions Iran, according to the IEA’s assessment.

However, the agency warns that starting in September, the reduction in OPEC+ production will result in a significant supply shortfall throughout the fourth quarter as outlined in its monthly oil report.

The IEA also cautions that the absence of production cuts at the beginning of the following year could shift the balance to a surplus. This situation is concerning because it would leave oil stocks at uncomfortably low levels, heightening the risk of another surge in volatility in an already fragile economic environment.

“Chaotic” Forecasting Raises Concerns

Broader economic concerns, exacerbated by China’s sluggish post-pandemic recovery, have been compounded by apprehensions of persistently high interest rates in the United States. Nevertheless, the IEA observes that oil demand in the world’s largest oil-importing nation, China, has so far remained resilient despite its economic downturn.

The IEA emphasizes that China remains a pivotal factor in global oil demand and economic stability, stating, “China is the main wild card. Any abrupt weakening of China‚Äôs industrial activity and oil demand is likely to spill over globally, making for a more challenging climate for emerging markets in Asia, Africa, and Latin America.”

Differing Forecasts Highlight Uncertainties

Forecasts for global demand and supply in 2023 and 2024 vary significantly among different organizations. Both the IEA and OPEC, in its monthly report released on Tuesday, expressed optimism regarding Chinese demand in 2023, resulting in limited changes to their global demand estimates for this year and the next.

The IEA forecasts global demand in 2023 to grow by 2.2 million bpd, while OPEC anticipates growth of 2.44 million bpd. However, for 2024, there is a stark contrast. The IEA expects a substantial slowdown in growth to 1 million bpd, while OPEC holds a considerably more optimistic estimate of 2.25 million bpd.

Meanwhile, the U.S. government’s Energy Information Administration (EIA) forecasts demand growth at 1.81 million bpd for 2023 and 1.36 million bpd for the following year.

In this dynamic and uncertain landscape, Tamas Varga of oil broker PVM aptly sums up the situation, saying, “Welcome to the chaotic world of forecasting.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Surge as China’s Holiday Demand and Tight US Supply Drive 2% Weekly Gain

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Oil prices to close the week with about a 2% gain as robust holiday demand from China and constrained U.S. fundamentals overshadowed concerns about potential supply increases from Saudi Arabia.

Brent crude oil, against which Nigerian oil is priced, gained 5 cents to $95.43 per barrel at about 6:00 a.m. Nigerian time on Friday while the U.S. West Texas Intermediate crude (WTI) rose by 16 cents to $91.87 per barrel.

The market’s resilience became evident as it rebounded from a slight 1% dip in the previous session when profit-taking followed a surge in prices to 10-month highs.

China, the world’s largest oil importer, played a pivotal role in driving prices higher. Strong fuel demand coincided with China’s week-long Golden Week holiday, with increased international and domestic travel significantly boosting Chinese oil consumption.

Analysts at ANZ noted that this holiday season’s surge in travel was underpinned by the fact that the average daily flights booked were a fifth higher than during Golden Week in 2019, pre-dating the COVID-19 pandemic.

Also, improving macroeconomic data from China and the steady growth of its factory activity further supported the bullish sentiment.

The U.S. economy’s robust growth and indications of accelerated activity in the current quarter also bolstered expectations of sustained fuel demand.

Also, tight supplies in the U.S., evidenced by dwindling storage levels at Cushing, Oklahoma, provided additional support to oil prices. As rig counts fell, U.S. oil production was expected to slow down, potentially pushing the market into a deficit of more than 2 million barrels per day in the last quarter.

Investors are now eagerly awaiting the upcoming meeting of the Organization of the Petroleum Exporting Countries and allies (OPEC+), scheduled for October 4th.

The meeting will be a crucial indicator of whether Saudi Arabia will consider stepping up its supply in response to the nearly 30% surge in oil prices this quarter.

Analysts, however, caution that the market may be entering overbought territory, leading to possible hesitancy among participants and concerns that OPEC+ could ease production cuts earlier than planned if prices continue to rise.

The outcome of next week’s OPEC meeting will undoubtedly hold significant implications for the oil market’s future trajectory.

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Oil Prices Soar to a Year High as Crude Reserves Plummet

Crude stocks at a pivotal storage hub in Cushing, Oklahoma, hit their lowest levels since July last year, sparking concerns about future supply stability.

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Oil prices surged to their highest level in over a year during Asian trading hours, following a significant drop in crude stocks at a key storage hub.

Crude inventories in Cushing, Oklahoma, plummeted to a mere 22 million barrels in the fourth week of September, close to operational minimums, according to data from the U.S. Energy Information Administration (EIA).

This translates to 943,000 barrels compared to the prior week.

The U.S. West Texas Intermediate (WTI) rose to $95.03 per barrel during Asian trading hours, a peak not seen since August 2022 before settling at $94.61 per barrel.

Meanwhile, Brent crude oil, the international benchmark for Nigerian oil, rose by 1.05% to $97.56 per barrel.

Experts have attributed this rapid price escalation to the precarious situation in Cushing, with Bart Melek, Managing Director of TD Securities, stating, “Today’s price action seems to be Cushing driven, as it reaches a 22 million bbl low, the lowest level since July 2022.”

Melek expressed concerns about the challenges of getting crude oil into the market if inventories continue to dip below these critical levels.

Predicting the future trajectory of oil prices, Melek suggested that prices could remain at elevated levels for the remainder of the year, especially if the global oil cartel, OPEC+, continues to enforce supply restrictions.

He noted that the global oil market is facing a “pretty robust deficit” on top of an already significant shortfall for this quarter due to OPEC’s production cuts.

Saudi Arabia, a key player in OPEC+, has extended its voluntary crude oil production cut of 1 million barrels per day until the year’s end, bringing its crude output to nearly 9 million barrels per day.

Russia has also pledged to continue its 300,000 barrels per day export reduction until December.

However, Melek added that, “We do think that prices could keep up near these levels for quite some time. But I don’t think it’s too permanent. And we might have seen the end of this rally.”

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Nigerian Pump Prices May Increase as Crude Oil Hits $93.55 Per Barrel

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Amidst growing concerns over the surging price of crude oil on the international market, Nigerian citizens are bracing themselves for a possible increase in pump prices.

Crude oil, the lifeblood of Nigeria’s economy rose to $92.42 per barrel on Monday, casting a shadow of uncertainty over the already volatile fuel market.

This surge in crude oil prices comes in tandem with the persistent depreciation of the Naira in foreign exchange markets, where it traded at N980 to $1 on the parallel market. For many Nigerians, these simultaneous developments trigger memories of the recent fuel price hikes that followed the removal of fuel subsidies earlier this year.

In June, the government removed the subsidy, leading to a sharp 210% increase in the pump price from N175 per liter to N546.83 per liter. In a further blow to consumers, less than a month later, the price surged again, reaching N617 per liter.

However, since then, there have been no additional fuel increments, despite fluctuations in the Naira’s exchange rate. President Bola Ahmed Tinubu, along with key government officials and industry leaders, has reiterated their commitment to stabilizing petrol prices in the country.

According to Ajuri Ngelale, Special Adviser to the President on Media and Publicity, “The President affirms that there will be no increase in the price of petroleum motor spirit.”

Mele Kyari, Group Chief Executive of the Nigerian National Petroleum Corporation Limited (NNPC), echoed this sentiment, emphasizing that NNPC is the sole supplier of petrol nationwide and has not proposed any price hikes.

Industry experts like Chinedu Okonkwo, President of the Independent Marketers Association of Nigeria (IPMAN), have urged the government to expedite efforts in implementing Compressed Natural Gas (CNG) as a viable alternative to traditional fuels, providing a long-term solution to the country’s energy needs.

While the global crude oil price surge is a cause for concern, Nigerians are holding onto the government’s commitment to price stability and the potential for CNG to provide a sustainable energy alternative in the future.

In a market with unique dynamics, where NNPC remains the sole supplier and importer of fuel, the hope is that prices will remain stable for the benefit of all Nigerians.

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