October 02, 2023 (MLN): Oil prices extended their upward trajectory for the fourth straight month in September as the market continued to weigh on OPEC+'s decision to extend supply cuts to the end of the year.

Brent Crude and WTI, the two major benchmarks, surged by 5.93% and 7.96% MoM, reaching $91.72 and $89.80, respectively in September.

OPEC+ in its meeting held on September 05 decided to prolong their voluntary supply cuts to the end of the year, raising concerns among investors about potential shortages during the peak winter demand.

The market had already priced in the extension of voluntary cuts by Saudi Arabia and Russia into October, but the three-month extension was unexpected.

Saudi Arabia and Russia cumulatively pledged to reduce oil production by 1.3 million barrels per day (bpd).

Additionally, both leading producers announced plans to review the supply cuts monthly and adjust them based on market conditions.

It is pertinent to note that during the month, WTI went above the $95 mark for the first time in more than a year following fresh Saudi and Russian crude output cuts.

Although China's COVID-19 restrictions and economic weaknesses persisted in the market, but concerns over a tight supply outlook overshadowed ongoing worries about Chinese economic activity.

Apart from the tighter supply outlook, there were several other factors which influenced oil prices:

Russia bans fuel exports

Oil prices were further supported by Russia’s temporary ban on gasoline and diesel exports to all countries outside a circle of four ex-Soviet states, aimed at stabilizing the local fuel market.

OPEC oil forecasts

The Organization of the Petroleum Exporting Countries (OPEC) stuck to its forecasts for robust growth in global oil demand in 2023 and 2024, citing signs that major economies are stronger than expected.

According to the monthly report issued by the entity, oil demand is expected to rise by 2.25m barrels per day (bpd) in 2024.

FED’s hawkish stance

The U.S. Fed Reserve in its meeting held on September 20, kept interest rates unchanged at 5.25%-5.5% but indicated another hike of a quarter percent by year-end.

Throughout the latter half of September, oil prices faced significant pressure as the market assessed the major central bank's intention to keep interest rates up for an extended duration.

Oil prices and interest rates have an inverse relationship, as in an environment of rising interest rates economic activity contracts and oil demand dampens.

U.S. dollar index

DXY, which tracks the value of the dollar against six other major currencies, marked its 11th consecutive weekly gain a streak not seen since 2014. Moreover, in September, DXY recorded a 2.43% increase.

When the U.S. dollar appreciates, dollar-denominated commodities become more expensive, leading to a negative impact on demand.

However, after prices soared to 10-month highs, investors started to lock in profits as some worried that a higher interest rate outlook may weigh on oil demand.

Consequently, the gains were restricted in the second half of the month.

Copyright Mettis Link News

Posted on: 2023-10-02T13:09:05+05:00