Aug 25 / Victor Arduin

Energy Weekly Report - 2023 08 25

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"Furthermore, the coordinated joint efforts by OPEC+ have yielded significant results in limiting global oil supply, and with Saudi Arabia's influence, this restriction may be further intensified before the year's end."

Deficit Outlook in the Oil Market

  • The OPEC+ has been making efforts to provide support to oil prices, particularly considering the significant losses in the market during the first half of the year.
  • Global oil supplies are steadily declining, with a focus on U.S. inventories that have dropped in the last week by 6.1 million barrels.
  • Risks of a sharp drop in oil prices are diminishing due to the notable supply deficits emerging in the market.
  • The major oil benchmarks continue to display a backwardation price curve, providing advantages for companies to sell their output in the short term.


in October, for the third consecutive month, it is expected that Saudi Arabia will limit its oil production to 1 million barrels per day. Currently, the country is operating at a level of around 9 million bpd, the lowest since 2021.

Oil fundamentals are showing signs of scarcity, demonstrated by a new reduction of 6.1 million barrels in the United States and by floating storage in VLCC ships, which has reached its lowest levels in 2023.

With the price curve exhibiting backwardation, oil producers remain motivated to trade their production in the short term, capitalizing on the advantages of higher prices compared to what they would receive in future sales.

Image 1: VLCC Floating Storage Vs. Brent Futures Spread

Source: EIA

Image 2: U.S. Commercial Crude Oil Vs. WTI (US$/bbl)

Source: EIA

Impact of OPEC+ on Oil Prices

Global oil supplies are progressively decreasing. While the market remains highly attentive to U.S. inventories, which once again recorded a decline of 6.1 million barrels to reach a total of 433.5 million barrels, other indicators point to further fundamentals of energy scarcity. By August, slightly over 16 million barrels were confirmed to be stored in Very Large Crude Carriers (VLCCs), the lowest volume in 2023.

Furthermore, the coordinated joint efforts by OPEC+ have yielded significant results in limiting global oil supply, and with Saudi Arabia's influence, this restriction may be further intensified before the year's end. Holding approximately 40% of global supply, the group wields considerable influence over future energy markets.

Image 3: Production and Monthly Exports from OPEC (M bpd)

Source: Refinitiv

In the meantime, there are discussions regarding Saudi Arabia's potential decision to prolong its voluntary reduction of 1 million barrels per day in output for the third consecutive month, possibly extending into October. Since June, the country has been working to limit global supply to balance the dynamics between oil demand and supply. Its production is now at its lowest level since 2021, with declines also being observed in exports.

Consequently, the risks of a sharp drop in oil prices, similar to what occurred in the first half of this year, are diminishing. The key driver behind this stronger performance in the second half is the notable supply deficits emerging in the market. Recently, the International Energy Agency (IEA) in Paris forecasts a deficit of 1.7 million bpd for the second half of the year.

Image 4: Crude Oil Production Saudi Arabia (M bpd)

Source: Refinitiv

Market Remains in Backwardation

While the price curve continues to display backwardation, oil producers are incentivized to market their production in the near term, capitalizing on more favorable price conditions.

If additional stimulus measures from China contribute to a more optimistic sentiment regarding oil consumption in the country, coupled with supply constraints from OPEC+, it's likely that the price curve will remain in backwardation for the rest of the year.

However, oil prices are encountering growing resistance in reaching higher levels. After experiencing an increase of over 15% in July, concerns about the trajectory of interest rates in the United States and Chinese weak economic data are generating uncertainties regarding global energy demand.

Image 5: Backwardation Curve WTI and Brent (U$/bbl)

Source: Refinitiv

In Summary

The efforts of oil production reduction by OPEC+ have played a crucial role in maintaining energy prices. However, if Chinese economic growth disappoints in the second half, it might potentially undermine the effectiveness of these measures that have limited global supply.

In recent weeks, a cautious approach has prevailed as investors seek more precise information about maintaining interest rates at elevated levels. Besides fostering a strengthening of the American currency, making energy commodities more expensive for holders of other currencies, it also increases the risks of a worsening economic situation, strongly correlated with oil consumption.

Therefore, the economic indicators that will be released in the upcoming weeks in the United States will play a crucial role in fostering greater market confidence that the restrictive monetary cycle is nearing its conclusion, redirecting attention to the tight levels of global oil inventory.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Natália Gandolphi


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