Oil prices took a downward turn on Wednesday, erasing gains from the previous session, as concerns over supply disruptions from Saudi Arabia and Russia were overshadowed by the strength of the US dollar.
Brent crude futures slipped by 9 cents to settle at $89.95 per barrel at 0657 GMT, while US West Texas Intermediate crude (WTI) futures also dropped 9 cents to reach $86.60 per barrel.
The US dollar held steady against a basket of currencies at 104.69, hovering close to the six-month high of 104.90 recorded overnight. A robust dollar can have a dampening effect on oil demand as it makes the commodity more expensive for holders of other currencies.
Experts from Rystad Energy and ING Economics noted that output reductions by OPEC+ were expected to result in a more significant supply deficit in the fourth quarter of 2023, which should provide continued support for oil prices.
Nevertheless, ING Economics refrained from revising its price forecasts upward due to ongoing concerns about demand. These concerns were linked to the increasing supply from Iran, which currently produces approximately 3.1 million barrels per day (bpd) and aims to increase production to around 3.4 million bpd. ING Economics analysts emphasized that their oil balance projections indicated a small surplus in the first quarter of 2024, potentially limiting any significant price increases.
Reflecting the immediate supply concerns, front-month Brent futures traded close to nine-month highs, at $4.13 per barrel above prices for delivery in six months. For US WTI futures, the spread between the front-month and six-month contracts widened to as much as $4.5 per barrel on Wednesday, also nearing nine-month highs.
Saudi Arabia announced its decision to extend its voluntary oil output cut of 1 million bpd for an additional three months until the end of December 2023, according to the state news agency SPA, citing an energy ministry official. Russia, too, confirmed an extension of its oil export reduction by 300,000 bpd until year-end, as stated by Deputy Prime Minister Alexander Novak.
These actions by Saudi Arabia and Russia supplement the production cuts initially agreed upon by several OPEC+ members in April, which extend through the end of 2024. Both countries pledged to review their decisions on a monthly basis, taking into account market conditions and the possibility of deepening cuts or increasing output, as noted by SPA and Novak.
Sugandha Sachdeva, Executive Director and Chief Strategist at Acme Investment Advisors, highlighted the commitment of Saudi Arabia and Russia to price stability in a challenging market environment. However, Sachdeva cautioned that the annual refinery maintenance period in the US, occurring from September to October, might limit crude demand and potentially act as a restraining factor on rising oil prices.
