From $89 to near $100 and back: How Brent crude moved since last Diwali

Among other reasons, a stronger US dollar and the spike in US bond yields in the last few months have also dictated the movement of crude oil prices. High interest rates maintained by global central banks to control sticky inflation in the majority of the period in the last 12 months have also impacted the trajectory of crude oil prices.

Also Read: From high inflation to import bill – the domino effect of rising crude oil prices on Indian economy

Since November 2022 to now, Brent crude has swung from $89 per barrel to its 10-month high of $97 in late September, and coming down to its current $81.4 mark. Last week, the crude benchmark also crashed to $79/barrel mark over waning demand from top oil consumers including US and China.

What’s been the movement of crude oil prices in the last 1 year?

-In April 2023, OPEC+ announced oil production cuts of around 1.16 million barrels per day (bpd) in a surprise decision. The shock cut, led by Saudi Arabia, immediately drove crude oil prices 8 per cent higher to $83.95 a barrel, which at the time – was the highest rise in more than a year. The voluntary cuts started from May 2023 and were put in place to last until the end of the year.

-OPEC+ met for its scheduled oil output policy decision in June 2023 and announced that it will reduce overall production targets from 2024 by a further total of 1.4 million bpd. OPEC nations produce around 30 per cent of the world’s crude oil. Saudi Arabia is the largest oil producer within the cartel, producing more than 10 million bpd. OPEC+ pumps around 40 per cent of the world’s crude.

-However, Saudi Arabia, OPEC cartel’s dominant member, announced that it will alone make deep production cuts of 1 million bpd starting from July, as part of a broader output-limiting OPEC+ deal as the group faces flagging oil prices and a looming supply glut. The rest of the OPEC producers then had agreed to extend earlier cuts in supply through the end of 2024.

-A month later, Russia joined Saudi to announce an extra oil export curb of 300,000 bpd. In September, Saudi Arabia and Russia together announced that will extend with the oil supply curbs of more than 1.3 million bpd till the end of the year. The production cuts first announced by the oil majors in July led to a sharp surge in international crude prices – reaching almost one-year high levels, and posed fresh inflationary pressures for the global economy. 

-By the end of September 2023, crude oil prices had risen 30 per cent in three months, with Brent staring at the $100/bbl-mark, over the supply cuts by the oil producing majors. US West Texas Intermediate crude (WTI) rose 29 per cent and Brent futures surged 27 per cent between July-September.

-As oil futures inched closer to $100 a barrel, many investors took profits on the rally given ongoing macroeconomic concerns. Crude prices going above $100 per barrel mark brings inflationary pressures on global economy and will compel central banks to raise interest rates all over again.

-In October 2023, the Israel-Hamas war drove crude oil prices between 3-6 per cent, however, the momentum could not be sustained as global demand concerns outweighed the impact of supply cuts. Since then, Brent has come down to an average of $80/bbl-mark and is expected to hover between $80-$85/bbl. 

-The Indian crude oil basket averaged ~ $80.1 per barrel in the first five months of FY24. But the price of the Indian crude basket touched $90.7 per barrel in the first week of September. ‘’If Brent crude prices remain elevated at this level for the remainder of the fiscal, we anticipate that the full-year average price for Indian crude oil basket could be ~$86-87 per barrel,” said CareEdge Ratings.

Also Read: The ‘Crude’ Question: Despite restricted supply, can oil sustain at $100/bbl?

The Big Question: Why did OPEC+ cut oil output?

-Data from China has aroused fears that the economic recovery after coronavirus lockdowns by world’s second-largest oil consumer is losing steam. A global recession could lead to lower oil prices.

-Weak Chinese economic data this week increased worries of faltering demand. Refiners in China, the largest buyer of crude from Saudi Arabia, the world’s largest exporter, asked for less supply for December.

-The oil production cut means that a tighter market and higher oil prices will continue to keep investors on their toes. If prices spike as many analysts now predict, it could more than compensate for lower sales, boosting OPEC revenues. 

-The oil supply cut demonstrates Saudi Arabia’s own revenue needs as it seeks to fund its ambitious domestic economic reform agenda — called Vision 2030 — under which plans to invest $3.2 trillion to diversify the Saudi economy by 2030.

-US Federal Reserve Chairman Jerome Powell has maintained his stance over interest rates and said last week that the central bank will not hesitate to hike rates again, is the economic conditions demands so. Higher interest rates can reduce oil demand by slowing economic growth.

-OPEC observers also said that the group needs nominal oil prices to be higher because money printing by the West in recent years has lowered the value of the US dollar, the currency in which oil is traded.

Closing prices of Brent crude, MCX of the week:

Oil prices gained about 2 per cent on Friday, November 11, as Iraq voiced support for OPEC+’s oil cuts ahead of a meeting in two weeks and as some speculators covered massive short positions ahead of weekend uncertainty. Iraq’s oil ministry said Baghdad is committed to the OPEC+ agreement on determining production levels.

Also Read: OPEC sticks to 2024 oil demand, IEA downgrades on macro concerns

Still, prices settled with weekly losses of 4 per cent, their third straight weekly decline. Brent futures rose $1.42, or 1.8 per cent, to settle at $81.43 a barrel on Friday, while US WTI crude rose $1.43, or 1.9 per cent, to settle at $77.17, according to news agency Reuters. Brent and WTI notched their third straight weekly losses for the first time since May, although both benchmarks exited technically oversold territory.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a November 17 expiry, settled 1.24 higher at ₹6,451 per bbl on Friday, having swung between ₹6,330 and ₹6,486 per bbl during the session, against a previous close of ₹6,372 per barrel.

Crude oil prices have experienced a significant downturn, plunging by nearly 10 per cent over the past eight days. On Wednesday, the price of Brent crude dropped below $80 per barrel for the first time since July, driven by mounting concerns about demand due to the lackluster economic outlook in China and Europe.

Analysts at Citi said in a note earlier this week that they expected the downward pressure to ease and prices to recover after falling to their lowest since July. “We expect prices to consolidate, and we maintain our near-term price forecasts with support expected to come from refinery maintenance easing and a shift in the risk-reward for investors following the recent sell-off,” said Citi.

Additionally, OPEC+ will meet for its next scheduled oil output policy decision on November 26.

Analysts at Capital Economics said OPEC+ might cut supply further if prices continue to fall. “We are sticking with our forecast of Brent ending both this year and next year at around $85 per barrel,” the research firm said in the note.

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Updated: 12 Nov 2023, 06:11 AM IST