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A potential oil price rally to $100 per barrel raises questions over demand destruction

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Supply cuts from heavyweight crude producers have pushed oil prices near $100 a barrel, prompting some to consider the possibility of future demand destruction.

Brent crude oil futures were up 63 cents a barrel at $96.01 a barrel at 11 a.m. London time on Friday from Thursday’s settlement price, well above prices observed in the first half of this year.

Some analysts warn the rise could be short-lived. Sushant Gupta, director of Asia refining research at Wood Mackenzie, said on Monday that “all indications are that we may see prices fall to $100 a barrel in the fourth quarter,” but warned Global economic fragility and the upcoming seasonal drop in demand in the first quarter will make this unsustainable in the long term. In Friday’s reportING analysts said the oil market was “clearly in overbought territory”.

Wood Mackenzie says oil prices are unlikely to remain at $100 a barrel for long

At the heart of the price support is a series of voluntary production cuts that are not part of the official policy of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+. The first is that some OPEC+ members will reduce production by 1.66 million barrels per day by the end of 2024. In addition, Saudi Arabia and Russia have also committed to reducing production by 1 million barrels per day and exports by 300,000 barrels per day respectively until the end of 2024. the end of this year.

That adds to improving demand in China, which analysts say may soon peak, and falling inventories.

Some say buyers can weather the storm of high prices. Seven European refiners and traders, who spoke on condition of anonymity due to contractual obligations, told CNBC that local buyers could withstand oil prices rising into triple digits without reducing production. All sources point to firm refining margins, meaning the difference between the value of refined products and the price of the crude feedstock from which they are produced is favorable.

Uncertainty over China’s further imposition of fuel export quotas, while Russia’s indefinite ban on its fuel exports (which Europe cannot buy due to sanctions following Moscow’s sweeping invasion of Ukraine) has tightened supplies of refined products and is particularly likely to exacerbate global diesel shortage. Disruptions to Russian crude supplies due to sanctions, combined with OPEC+ production cuts, have reduced access to dense, high-sulphur crude for Western buyers, hampering their mission to produce certain refined products.

So far, refinery margins remain attractive enough that some have eased seasonal maintenance to take advantage, one refiner said. Demand for refined products in the West is likely to remain strong as the Thanksgiving and winter holidays boost U.S. and European travel and as hurricane season approaches – which historically could disrupt local refining and crude production.

“We estimate that a significant hurricane event this year could result in a temporary loss of approximately 1.5 million barrels per day of monthly offshore crude oil production and an almost equal temporary loss of refining capacity,” the U.S. Energy Information Administration said. July says.

“An outage of this magnitude could increase average monthly U.S. retail gasoline prices by 25 cents/gallon to 30 cents/gallon.”

“Self-fulfilling prophecy”

Some European market participants surveyed by CNBC expressed doubts that triple-digit oil prices can be sustained in the long term, with three citing the potential for demand destruction, with consumers gradually buying less in response to continued high prices. A fourth respondent said demand destruction becomes a potential issue once prices hit $110 a barrel.

“Sometimes high oil prices can become a self-fulfilling prophecy,” India’s energy minister Hardeep Singh Puri warned in August. “A self-fulfilling prophecy means that at a certain point in time there will be a tip, and then demand will drop.”

One market source also pointed out that sharp backwardation – where current prices exceed future prices and is also a key indicator for assessing storage viability – is holding back refined product inventories, leaving the market vulnerable to any disruption.

“OPEC+ production cuts, including additional voluntary cuts by Saudi Arabia, are bearing fruit, lowering oil inventories and supporting “The price has changed.” UBS strategist Giovanni Staunovo said in a report on Thursday that the bank set its oil price forecast at $90-100 per barrel. in the coming months.

Moscow has benefited from rising oil prices despite sanctions. Non-G7 buyers can only import Russian crude at $60 a barrel or less using Western shipping and insurance under a plan by the world’s largest economies.

But Moscow has been deploying its own dark fleet, and traders say Russia’s flagship Urals crude is currently selling for about $8-10 a barrel at a discount to benchmark oil prices, meaning the price per barrel is higher than the G7 price cap $25. The Russian Energy Ministry did not respond to CNBC’s request for comment.

OPEC+ initiative

The OPEC+ technical committee will meet on October 4 to review market fundamentals and individual production compliance. Although OPEC+ policy cannot be adjusted, the Joint Ministerial Monitoring Committee can convene an emergency ministerial meeting to adjust OPEC+ policy. Three OPEC+ representatives said on condition of anonymity due to the sensitivity of the discussions that the upcoming JMMC meeting was unlikely to lead to policy changes.

The White House has previously publicly called on OPEC+ producers to increase production, lower oil prices and ease inflation – but Washington has remained largely silent on the decline. In October last year, the United States accused Saudi Arabia, the de facto leader of OPEC+, of coercing other OPEC+ members and relying on oil revenue for its massive economic diversification plan.

The White House faces a difficult balancing act as it pushes to normalize relations between Israel and Saudi Arabia, two top allies in the Middle East. Riyadh has also shown signs of moving closer to China and Russia after rekindling ties with Iran through Beijing-brokered talks and receiving an invitation to join the BRICS alliance of emerging economies. A series of high-profile official U.S. visits to Saudi Arabia this summer suggests discussions are continuing, although whether oil returns to the diplomatic agenda remains to be seen.

RBC's Helima Croft says it's unclear what steps the White House will take next to ease oil prices

Helima Croft, head of global commodities strategy at Royal Bank of Canada, said “we clearly see momentum rising” in Brent crude prices reaching $100 a barrel, highlighting U.S. tools There aren’t many options in the box.

“Is there going to be an energy component in a potential U.S.-Saudi Arabia deal? I think the Saudi Arabian government obviously wants more Saudi oil in the market because, look, this administration doesn’t have a lot of good options to Lower the price,” she said Wednesday.

“They’ve already done a massive (strategic oil reserve) release, and the question is are they really going to do more… They’ve done a deal with Iran, but the oil has already come to the market, so it’s not clear what the government’s Next up is the extra bucket.”

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