Crude oil shortage could catalyse further gains for Brent

Russia and Saudi Arabia may extend voluntary production cuts and further squeeze oil supplies, possibly driving Brent futures higher.

PHOTO: Getty Images

Russia’s deputy prime minister Alexander Novak confirmed that the Kremlin agreed to reduce its oil supplies to foreign markets at a meeting held by Russian President Vladimir Putin, reported Russian state agency TASS. The details will be announced next week, Novak clarified.

Novak’s confirmation to Putin may indicate that Russia will extend the voluntary 500,000 b/d oil production cut into October. In addition, ING’s head of commodities strategy, Warren Patterson, expects Saudi Arabia to extend its voluntary output cut of 1 million b/d into October.

Meanwhile, in Western markets, the US commercial crude stocks have plummeted to their lowest levels since December 2022, tightening the global oil supply. Extended production cuts from Saudi Arabia and Russia could further tighten the already tight oil market.

“Global oil inventories are now only 10 million bbls away from the record deficit set in June 2022, which reversed solely due to the largest release from [US] strategic political reserves in history,” said energy-focussed hedge fund investor, Eric Nuttall.

However, emergency oil reserves in the US are still below 400 million bbls. This could make it difficult for the US to release oil on the market as a cushion against supply disruptions and control Brent's price.

In addition, news reports about a military coup in West Africa's Gabon have further exacerbated oil supply concerns. OPEC member Gabon produced 210,000 b/d of oil in July, according to the International Energy Agency. This could be another brick in the wall for the shrinking oil supply, even if it's only a minor disruption.

“Demand is setting records just as Supply drops on deeper OPEC cuts. Positioning is v [very] favorable, [oil price] spreads healthy & cracks supportive. More upside coming. Long,” said energy investor Peter Sutherland in a social media post.

Amid optimism about a steady oil demand for the rest of the year, the falling oil supplies will give a significant tailwind to Brent prices. Overall, oil-focussed investors, including Nuttall and Sutherland, forecast strong upside potential for Brent and remain "bullish" on the charts in the coming months ahead.

By Konica Bhatt

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