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Oil set to resume rally on sharp inventory decline

Market fundamentals also favour a sustained bull run for oil

Published: Sun 20 Aug 2023, 6:43 PM

Updated: Sun 20 Aug 2023, 6:44 PM

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Oil pumpjacks in Los Angeles, California. Goldman Sachs estimates that worldwide oil demand hit an all-time high of nearly 103 million barrels in July. — AFP

Oil pumpjacks in Los Angeles, California. Goldman Sachs estimates that worldwide oil demand hit an all-time high of nearly 103 million barrels in July. — AFP

Macroeconomic fundamentals of the world's largest and second-largest economies --- the US and China ---- are turning more bullish to support oil prices with oil demand possibly heading to a fresh record this month, forecasts by the International Energy Agency (IEA) said.

Analysts said market fundamentals also favour a sustained bull run for oil, especially with the Opec+ gearing up to put a huge deficit into the market in the second half.


After ending a seven-week rally last week, prices rose about 1.0 per cent on Friday on signs of slowing US output. Both crude benchmarks ended their longest weekly rally of 2023 on mounting concerns about global demand growth. West Texas Intermediate (WTI) crude futures gained 86 cents, or 1.1 per cent, to settle at $81.25 a barrel, and Brent crude futures rose 68 cents, or 0.8 per cent, to settle at $84.80 a barrel.

The IEA estimated that global oil demand, which hit a record 103 million barrels per day in June, could scale another peak in August. Output cuts from Saudi Arabia and Russia set the stage for a sharp decline in inventories over the rest of 2023, which the IEA said could drive oil prices even higher. Some analysts are even not ruling out the prospects of prices hitting $100 per barrel in the second half.

They argued that Saudi Arabia and Opec+ are staying the course with the cuts, with the kingdom extending its unilateral cut of 1.0 million barrels per day (bpd) into September and signalling it could extend it further, or extend and deepen it. They do not expect the Saudis to reverse the cuts at $90 or $92 oil as the kingdom is looking to ensure that the deficits created are materialising before deciding to put the brakes there.

Analysts at Kamco Invest said the recent support to prices came from record demand from Asian refiners for US crude deliveries amid obstacles that included high temperatures impeding pipeline deliveries to ports in the US. Reports of continued buying of Saudi crude oil by China also supported prices.

However, Saxo Bank analysts said with most of the oil demand growth expected from China, any trouble there may sour sentiment.

Ole Hansen, head of Commodity Strategy at Saxo Bank, said last week that having run out of steam above $87.50 last week, a long overdue period of consolidation may now emerge with the news from China hurting sentiment.

Some analysts believe that downside risks remain limited as long as Opec+ maintains production at current tight levels, not least considering IEA's forecast from Friday that oil demand surged to a record high in June and may rise even further.

Market pundits argued that estimated high stock levels in China allow its refiners to draw crude from inventories and slow purchases when oil prices rise, thus undermining the ongoing efforts of the Opec+ group and its leader Saudi Arabia to tighten the market and prop up prices.

“China built up the stocks to run them down when it wanted to avoid the overheated market of July-August,” Kpler analyst Viktor Katona said.

While weaker-than-expected Chinese economic data have stopped price rallies in their tracks, US economic prospects have turned somewhat brighter, with the Fed and investment banks no longer expecting a recession.

Last week, following seven consecutive weeks of gains, oil prices dipped after China reported another set of weak economic data. Concerns about the property and credit markets in the world's second-largest economy also weighed on market sentiment. Considering that China is expected to account for more than 70 per cent of this year's global oil demand growth, the worries about the Chinese economy are top of the bearish factors for oil, market experts said.



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