Opinion: Oil Prices Surge on Saudi Arabia and Russia's Supply Cut Extension

Oil prices experienced a significant surge of two percent on Tuesday, reaching their highest levels since November. This sudden increase came after Saudi Arabia and Russia jointly announced an unexpected three-month extension of their voluntary supply cuts, extending until the end of this year. The move has raised concerns among investors about potential shortages during the upcoming peak winter demand.

Brent crude futures, a key benchmark, witnessed a remarkable rise of $2.08, equivalent to about 2.3 percent, reaching $91.08 a barrel by 11:43 am EDT (1543 GMT). This marked the first time Brent crude surpassed the $91 level since November of the previous year. Simultaneously, US West Texas Intermediate crude (WTI) October futures recorded an increase of $2.42, approximately 2.8 percent, reaching $87.97 a barrel, marking a 10-month high.

While many investors anticipated Saudi Arabia and Russia to extend their voluntary cuts into October, the unexpected three-month extension took the market by surprise. OANDA analyst Craig Erlam noted, "It would appear they're trying to double down and capitalize on the recent price moves, putting a big buffer in place for when the cuts end."

Both Saudi Arabia and Russia stated that they would assess the supply cuts on a monthly basis, with the possibility of modifications based on market conditions. As a result of this extension, UBS analyst Giovanni Staunovo predicts a market deficit of more than 1.5 million barrels per day (bpd) in the fourth quarter of 2023. Consequently, with oil inventories expected to decrease further in the coming months, Staunovo anticipates Brent crude prices to rise to $95 per barrel by year-end.

Oil prices also received a boost from Goldman Sachs, which reduced the probability of a US recession beginning in the next 12 months from 20 percent to 15 percent. This adjustment in economic forecasts has positively impacted oil demand and prices in recent months.

Brent crude futures, responsible for pricing over three-quarters of the world's traded oil, have climbed approximately 26 percent since late June when Riyadh initially announced its voluntary cuts. Furthermore, the premium of the front-month Brent contract to the six-month contract surged to more than $4 a barrel on Tuesday, reaching levels not seen since November 2022. This market structure, known as backwardation, reflects tightening supply conditions for prompt delivery.