The Organization of Petroleum Exporting Countries (OPEC) announced a significant reduction in production during July, attributed to substantial cuts implemented by Saudi Arabia and Russia. While OPEC maintained its global oil demand projections for both 2023 and 2024, a slight upward revision was made to its forecast for worldwide economic growth. The convergence of a positive demand outlook and indications of tightening global supplies fuelled a rally in oil prices over the past two months with WTI crude reaching a 10-month peak.

However, this optimistic sentiment has been tempered by several factors. Concerns about deteriorating economic conditions in China, coupled with the potential imposition of elevated U.S. interest rates, cast uncertainty over OPEC’s positive projection. The appreciation of the U.S. dollar, reflecting expectations of prolonged higher interest rates, did not manage to exert downward pressure on recent oil price gains.

China, the world’s largest oil importer, emerged as a focal point of concern in the oil markets. Recent discouraging trade and inflation data, and the revelation of a decline in China’s oil imports, eroded optimism about a robust demand recovery. The nation grapples with the potential of a debt crisis in its property sector, posing a further threat to growth. Additionally, newly imposed investment restrictions on China by the U.S. raised apprehensions of a rekindled trade conflict.

Global oil markets are poised to experience a substantial supply deficit of over 2 million barrels per day during the current quarter, predominantly attributed to Saudi Arabia’s production reduction. Output from OPEC plummeted in the past month, as the kingdom unilaterally implemented cutbacks to stabilize markets. The Saudi-led production cut is set to continue in the upcoming months, potentially causing OPEC’s average production rate for the quarter to be approximately 27.3 million barrels per day—roughly 2.26 million barrels per day lower than consumer demand. This situation could result in the most pronounced inventory decline observed in two years.

The surge in oil prices was driven by escalating global consumption and the supply constraints imposed by OPEC and its allies collectively known as OPEC+. This has led to a depletion of inventories in the United States and other regions. Anticipating sustained OPEC+ supply reductions, the rest of the year could witness a gradual erosion of oil inventories, potentially leading to further price appreciation. However, these gains might be curtailed by impending economic headwinds projected to constrain global demand growth in 2024, as highlighted by the International Energy Agency (IEA).

SourceL TradingView

Oil prices are on track for their seventh consecutive week of advancement, with Wednesday’s price action breaking above its key resistance of $83.53, confirming that the prior down trend has reversed course and a new secondary up trend has started. The Relative Strength Index indicator is gradually improving also pointing to higher price levels in the months ahead. Given the bullish breakout on the daily chart and the improvement in the momentum conditions levels to $92.00 appear feasible over the medium-term.

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