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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Supply Cuts Boost Oil Prices But Economic Concerns Limit Gains

  • OPEC+ production cuts and extended supply reductions by Saudi Arabia and Russia have pushed oil prices to a peak of over $90 a barrel for 2023.
  • Economic growth uncertainties in the U.S., China, and Europe are preventing significant spikes in oil prices, despite tight market conditions.
  • While some analysts believe the oil market will remain tight, ensuring support for oil prices, the long-term outlook depends on macro-economic data and global demand.

A slew of bullish and bearish factors have battled for dominance in the oil market this year as OPEC+ efforts to tighten the market have run up against concerns about global economic growth.   

For most of the first half of this year, prices were trading in a relatively narrow range of $70-$80 per barrel until the extra Saudi production cuts on top of OPEC+ reductions lifted market sentiment and oil prices higher in July and August, and to a year-2023 peak of over $90 a barrel this week after Saudi Arabia and Russia extended their respective supply cuts into the end of the year.  

Oil prices haven’t shot up much, however, weighed down by persistent concerns about economic growth in the world’s two largest economies, the United States and China, and an already weak, barely-there growth in Europe. 

Uncertainty prevails and continues to keep oil prices in a narrow range, ironically leading to relatively stable oil prices, Reuters columnist Clyde Russell notes.

True, the latest announcement of extensions of the supply cuts sent oil prices higher. But they only moved up to an $85-$90 per barrel trading range, and analysts are not racing to predict $100 oil in the near term. That’s because uncertainty is looming large over the global economy and oil demand growth. 

Bullish Factors

The OPEC+ production cuts have tightened the market, especially the market for sour crude, as Middle Eastern exporters – the largest sour crude producers – hold off some shipments. Saudi Arabia, for example, is estimated to have seen its August crude oil exports plunge to the lowest since March 2021 as the Kingdom continues to slash production by 1 million barrels per day (bpd) to keep markets tight and push oil prices higher. 

The market is tight, and the latest announced cuts through the end of the year are likely to deepen the deficit in the fourth quarter, supporting oil prices, analysts say. 

“For now, tight market conditions are still on clear display through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both commanding a backwardation around 65 cents per barrel, up from close to flat around the time Saudi production cuts were implemented,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in a note on Wednesday.  Related: China’s Sinopec Says Peak Gasoline Demand Already Passed

“While the upside in our opinion remains limited there is no doubt that the current production cuts will keep the oil market tight, thereby providing support for oil prices, but whether that support translate to stable or higher prices will depend on incoming macro-economic data, and with that the outlook for demand,” Hansen added. 

The latest cuts “leave the market with a deeper than expected deficit over the fourth quarter of 2023, which should continue to support prices,” ING strategists Warren Patterson and Ewa Manthey said.

The bank, however, is “reluctant to revise higher our price forecasts on the back of this extension, as demand concerns continue to linger and Iranian supply is rising.” 

ING’s oil balance projection shows a small surplus in the first quarter of 2024, which should limit prices moving significantly higher. The bank continues to forecast that Brent Crude prices will average $92 a barrel over the fourth quarter of this year.

“Looking further ahead, we would not rule out a further extension of these cuts (fully or partially) into early next year, given that our balance sheet shows that the oil market will be in a small surplus over the first quarter of next year. Any cuts will obviously depend on where oil is trading towards the end of the year and whether demand worries are still present,” ING strategists said.  

Bearish Factors  

Macroeconomic headwinds and demand worries, especially in China, have been ever-present since early this year when Chinese macroeconomic data showed a less-than-spectacular rebound after the reopening. In addition, higher interest rates in the U.S. compounded concerns about whether the Fed will pull off a ‘soft landing’ after more than a year and a half of interest rate hikes.  

The latest data suggest that the labor market is cooling, and the Fed could pause the hikes when they meet at the end of this month. 

But if the move higher in oil stokes inflation again, interest rates could be kept higher for longer, dampening economic growth and oil demand. 


China’s crude oil demand is currently strong, driven by stock building and demand from refineries, which are exporting more fuel amid weak domestic demand, Saxo Bank’s Hansen said. 

Higher oil prices added to slowing economies in China and Europe, and potentially in the U.S., “does not in our opinion support sharply higher prices,” he added.  

“We do not join the $100 per barrel camp but will not rule out a relatively short period where Brent could trade above $90.”   

By Tsvetana Paraskova for Oilprice.com

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