Oil prices are set for a possible brief flirtation with the $100 mark due to production cuts and geopolitical tensions, according to a Wall Street analyst. However, this surge is expected to be short-lived, with prices likely retreating by the end of the year.
Citi’s global head of commodity research, Ed Morse, and his team, noted that “The Saudi appetite to withhold oil from the market, supported by Russia maintaining a certain level of export constraint, points to higher prices in the short term, all else equal, but $90 prices look unsustainable given faster supply growth than demand growth ex-Saudi/Russia.” Morse added, “Higher prices in the near term could make for more downside for prices next year.”
Crude oil prices have been on an upward trajectory for the past three months. West Texas Intermediate (WTI) has surged by approximately $23 per barrel since late June, reaching over $91 on Monday. Similarly, Brent crude futures have witnessed a more than 30% increase over the same period, currently hovering above $94 per barrel.
Citi’s analysts anticipate oil prices to average around $84 in the fourth quarter of 2023 and to dip into the low-$70 range in 2024.
Morse emphasized that production is on the rise among non-OPEC+ members such as the United States, Brazil, Canada, and Guyana. Even Venezuelan and Iranian exports have seen growth. He noted, “After the recent spike, these inventory dynamics should keep a lid on crude oil prices for the remainder of 2023 and 2024. And Saudi Arabia may yet reverse cuts if markets get too tight.”
In early August, Saudi Arabia extended its unilateral production cuts, while Russia reduced exports through the end of the year. These cuts supplement the OPEC+ reductions announced last year.
The recent surge in oil prices prompted RBC Capital Markets to raise the possibility of reaching $100 per barrel, describing it as “a momentum-based” market. Analysts Michael Tran and Helima Croft highlighted that “The notion of $100/bbl has evolved from completely unimaginable a few short months ago, to within striking (or hyping) distance today.”
Simultaneously, the prices of refined oil products have been on the rise. Gasoline prices reached new highs in 2023, with the national average at $3.88, according to AAA. Diesel prices, crucial for goods transportation via trucks, rose by $0.23 in one month, now standing at $4.57 per gallon.
Several airlines, including United Airlines (UAL), Delta (DAL), and American (AAL), have recently expressed concerns about lower profits due to rising fuel costs.
These escalating energy costs raise concerns about their potential negative impact on the broader economy, especially at a time when the Federal Reserve is actively working to curb inflation through interest rate hikes.
While Fed officials are expected to maintain interest rates at their current levels during this week’s meeting, they are keeping the door open for one more rate hike later this year.
Energy prices, particularly gasoline, were identified as the primary contributor to the hotter-than-expected Consumer Price Index released in August.
