August marked the third consecutive month of oil price growth. Tightening supply against the backdrop of mixed demand signals allowed the "bulls" to push Brent back to January's highs. Meanwhile, rumors are circulating in the market about the North Sea grade approaching the psychologically important $100 per barrel mark due to increased demand for black gold from China. According to the hedge fund Black Gold Investors, fuel demand in China is expected to increase by 500,000 bpd due to a 110% rise in domestic flights compared to pre-pandemic levels.
Monthly dynamics of oil prices
The main driver of the Brent rally from June to September has been OPEC+ oil production cuts. Investors expect Saudi Arabia to announce an extension of its commitment to cut black gold production by 1 million bpd for October. Russia has already declared a reduction in export volumes by 300,000 bpd in September, with Riyadh in line. It is doubtful that the leaders of the alliance, whose plans include maintaining high prices, will deviate from their previous commitments.
According to Goldman Sachs research, three rounds of oil production cuts by Saudi Arabia and its allies completely explain the return of the oil market to a deficit. The bank estimates it at 2.3 million bpd. At the same time, premiums on nearby Brent futures contracts are rising compared to more distant ones. Over the week, the spread has increased from 58 to 75 cents per barrel. There is a "bullish" model in the market, which is increasing demand for options to buy North Sea and Texas grades. It's not surprising that trading volumes with these options are growing.
Dynamics of call options trading volumes for WTI
The high demand from the United States also plays a significant role in the oil rally. The American economy is showing remarkable resilience to the most aggressive monetary tightening by the Federal Reserve in decades. Deferred demand due to the pandemic, colossal fiscal stimulus, rising real incomes, and a strong labor market are the foundation of the economy's strong positions. Significant deterioration may not be expected from it in the near future.
If China joins this foundation, Brent's rise to $100 per barrel will become a reality. According to Black Gold Investors, domestic flights in the fourth quarter of 2022 were at 75-85% of 2019 levels, and they have now returned to 110%. International flights have risen from very low levels to 75%, increasing fuel demand and contributes to rising oil prices.
In my opinion, after Saudi Arabia announces an extension of its production cut commitments, there will be a pullback due to the implementation of the "buy on rumors, sell on facts" principle. However, the market sentiment remains "bullish."
Technically, on the daily Brent chart, the inability of buyers to overcome resistance at $89 per barrel has become the first sign of their weakness. A decline in quotes below $88.1 would allow for short-term selling of oil, with subsequent reversals from $87.5, $86.7, and $85.8.
