Published: 12 September 2023

When crude surges above US$90 a barrel and the leaders of Saudi Arabia and Russia get on the phone to congratulate each other on a job well done, oil consumers should take note.

After half a year in the doldrums, the price of the world's most important commodity is on a tear as the biggest players in OPEC+ get serious about making sure supply doesn't exceed demand. The 1 million barrel-a-day output cut the Saudis initially pledged solely for the month of July will now be in place until year-end, alongside a smaller export reduction from Russia.

It's not just the size of the supply deficit likely to result from this — about 2,7 million barrels a day in the fourth quarter according to Rystad Energy A/S — that should worry consumers. It's the fact that the West's somewhat-estranged ally Riyadh, and its outright foe Moscow, are now bound so firmly together in their push for higher prices.

"Crude tightness seems quite legitimate and quite real," said Greg Sharenow, managing director at Pacific Investment Management Co. "This certainly keeps oil markets on the boil."

There had been some hope that the changing of the seasons would ease the tightness in oil markets. Forecasts from the Paris-based IEA, which advises major economies on energy policy, indicated a supply deficit of just over 1 million barrels a day in the fourth quarter, half as deep as the estimated shortfall from July to September.

Tuesday's joint announcement from Saudi Arabia and Russia shifted that outlook markedly, making the estimated deficit in the final quarter just as severe as over the summer. This means even higher oil prices worldwide, according to Oslo-based consultant Rystad Energy.

"Our supply-demand model shows some hefty deficits," said Emily Ashford, a commodity analyst at Standard Chartered Plc. "A cut by Saudi Arabia has a lot more clout than purported cuts elsewhere — when they say they will do it, they really mean it."

So what chance does the world have of avoiding a damaging oil price spike? When it announced the extension of its cuts, Saudi Arabia did say it would review the decision every month.
- Bloomberg

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