The price of U.S. West Texas Intermediate crude oil extended its rally to $79.57, reaching a three-month high. The recent surge in oil prices over the past four weeks has been supported by indications of reduced supplies, primarily due to output cuts by Saudi Arabia and Russia, as well as commitments from Chinese authorities to bolster their economy, the world’s second largest.

While expectations are that Saudi Arabia will extend its output cuts into September, sources indicated that Russia is likely to significantly increase oil loading in the same month, potentially putting an end to the steep export cuts they had been implementing. Meanwhile, there is uncertainty surrounding China’s ability to fulfil its policy promises.

The market is currently grappling with the balance between tightening global supply and concerns over slowing demand due to the ongoing global economic slowdown. Tuesday’s American Petroleum Institute figures revealed a surprising build of approximately 1.32 million barrels in U.S. crude stocks for the week ending 21 ^st of July, which could momentarily impact market sentiment if confirmed by official U.S. government data.

Crude contracts with earlier loading dates are commanding higher prices than those with later dates, indicative of a backwardation price structure that signals traders’ belief in tight supply conditions. The six-month spread for Crude is near a 2-1/2-month high.

Market participants are becoming increasingly concerned about the trend of dwindling oil supplies, and doubts about the expected drop-off in demand are dissipating. However, some economic data have tempered gains, such as a survey indicating a greater than expected contraction in business activity in the euro zone and a closely watched survey showing a slowdown in business activity to a five-month low in the United States.

Source: TradingView

Despite the monetary tightening by the Federal Reserve on Wednesday, oil prices rose on Thursday, erasing the losses from the previous session. The market’s focus remained on the expectations of tighter supplies from major oil-producing countries, with both Saudi Arabia and Russia announcing plans to further cut production in August to bolster prices by reducing global supply.

Oil prices have been considerably less volatile over the past four months than they were between 2020 and 2022. However, changes in world production and consumption could result in price changes. While in the near-term crude oil is likely to remain within the boundaries of its current trading range between $63.61 and $83.49, in the second quarter of 2023 and throughout 2024 we are likely to see higher prices as demand rises above supply. Once key resistance of $83.49 gets broken upwards, a new primary up trend would be in place targeting $90.00 first and $94.00 thereafter.

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