The oil market has been a roller coaster ride in 2023, oscillating between surprising production cuts and sluggish demand growth. This delicate balance between supply and demand has led to fluctuations in oil prices, a trend that has caught the attention of market watchers and analysts worldwide. Notably, Vishal Toora from Equity Guru has offered an insightful perspective on the evolving dynamics in a recent video.
Brent crude oil price is currently above the $77 per barrel mark, riding on a rally that was sparked off by supply-side decisions. Saudi Arabia extended its 1 million barrel per day (bpd) production cut into August, giving the market a supply shock. Adding to this, Russia announced export restrictions on its crude, expecting to cut exports by 500,000 bpd.
However, even with such significant supply cuts, oil prices have not experienced a rally as strong as expected. This somewhat muted response can be attributed to disappointing economic data from the US, Europe, and China. The manufacturing sector, which appears to be experiencing a recession in many regions, has further suppressed oil prices.
Despite these production cuts, data does not reflect a significant reduction in supply. After the initial OPEC+ cut in March, the global oil market has only faced a cumulative 1.1 million bbd less supply this year. In June, core OPEC production, as reported by Bloomberg, actually increased by 80,000 bpd versus May to 28.57 million bbd.
As Vishal Toora highlighted in his video, the oil market remains stagnant despite the buzz around the OPEC production cut in early 2023. The market viewed these cuts as signs of weakness, a testament to economies slowing down, and consequently, the oil rally lost momentum. However, the narrative could change with a new wave of production cuts by Saudi Arabia and Russia and the onset of the summer season, traditionally a period of higher oil demand.
It’s important to note that Saudi Arabia’s unilateral production cut is only a few days old and has yet to reflect in production data. Similarly, Russia’s voluntary 0.5 million bbd production cut announced in February hasn’t made a significant impact on oil exports yet. However, Russia’s decision to cut exports by an equivalent amount could potentially lead to tighter physical markets in the second half of the year.
In summary, while production cuts and changes in demand patterns paint a promising picture for a rally, the oil price’s true response will only unfold when physical markets begin to see tangible evidence of tighter supply conditions. Until then, a persistent oil price rally may remain out of reach.