The trajectory is clear. Oil prices are ramping up. The reasons are ample. Supplies are being tightened and demand is projected to go up while global inventory levels are going down. All these could result in a bull run, which most analysts are now emphasising.

On the supply side, oil heavyweights Saudi Arabia and Russia are intent on squeezing output to prop up oil market prices. Last week, Saudi Arabia and Russia announced extending their ‘voluntary’ output cut for another month – into September. Riyadh announced carrying forward its one million barrel per day (bpd) crude output cut into September. The Saudi announcement further added; the output cut could be extended even beyond.

And in close coordination, Russia also announced cutting crude output by 300,000 bpd in September. The extension in output cuts is on top of output quotas already in place across the broader Organisation of the Petroleum Exporting Countries-plus (OPEC+) group.

In addition, Nigeria and Angola have been unable to produce as much crude as their OPEC quota states. The suspension of crude oil loadings at Nigeria’s Forcados terminal due to a leak risk also adds to the market woes. And Libya’s output has been disrupted yet again, making the OPEC+ task even easier.

They are already in the $80s, but also have the potential to go into the $90s and even touch the $100 per barrel mark

With oil prices climbing about 12 per cent in July to about $83 a barrel, the production cuts are working. But both Saudi Arabia and Russia need oil prices to be still higher. While the International Monetary Fund (IMF) says Riyadh needs to keep prices at $81 a barrel, others insist Saudi Arabia may need up to $100-a-barrel crude to balance its books. Russia too, needs higher oil revenues to sustain the expenses of the war with Ukraine.

Despite slower demand growth in China, Russian Deputy Prime Minister Alexander Novak is of the view that global oil consumption could grow by 2.4m bpd this year. He was talking to the media after a ministerial panel meeting of the OPEC+ group early in August.

The Paris-based International Energy Agency (IEA) also forecasts a pickup in demand of up to 2.2m bpd. The IEA says this could lead to supply tightness of about 1.7 million bpd in the second half of 2023.

Many other analysts are also concurring. “With the production cut extended, we anticipate a market deficit of more than 1.5m barrels per day (bpd) in September, following an estimated deficit of around 2m bpd in July and August,” UBS analysts wrote in a note.

Standard Chartered demand model is now projecting a supply deficit of 2.81m bpd in August, 2.43mn bpd in September and more than 2m bpd in November and December. Its analysts are also projecting that global inventories will fall by 310m barrels by the end of 2023 and another 94m barrels in the first quarter of 2024.

‘This would keep oil markets backwardation and push oil prices higher,’ Alex Kimani said in his piece on Oilprice.com. Consequent to all these, oil prices have been projected to climb to $93 per barrel by the fourth quarter of the year.

Petrol rates will have to increase in line with global oil prices under the IMF programme since Pakistan has committed to a levy of up to Rs50 a litre.

Lower inventory is becoming an issue too. US gasoline stocks fell by 2.7m barrels last week, while distillate inventories, which include diesel and heating oil, dropped by 1.7 million barrels, the US government data showed.

A week earlier, the US Energy Information Administration reported that the country’s crude oil inventory declined by a record 17m barrels last week, as exports and refiners’ crude oil input ramped up in the heart of summer travel season. This is also bearing an impact on oil markets.

Oil prices are gaining momentum. And the rally has enough steam to continue further. It is already in the 80s, but it also has the potential to go into the 90s and even touch the $100/barrel mark. Much, however, would depend upon the duration of the ‘voluntary’ output cut and the global demand scenario. That remains a big if.

For crude oil importing countries like Pakistan, the crude price outlook is disturbing. For the last many months, almost during the entire tenure of the PDM government, oil prices have been soft, helping the finances of the government.

On the crude front, the new ‘caretaker’ government could now face a difficult scenario. If oil prices continue rising in the international market, Pakistan has no choice but to increase oil prices to meet the objectives of an IMF bailout, as Pakistan has committed to a petroleum levy of up to Rs50 a litre.

Published in Dawn, The Business and Finance Weekly, August 14th, 2023