Prices of oil in the US hit a 10-month high as oil shortages are expected until the end of the year following Russia and Saudi output cuts.
In response to fears of weaker supply, the prices of oil rose on Thursday. The West Texas Intermediate (WTI) crude climbed 1.6% to $90.04 per barrel, its highest point since November last year. Brent crude also sold at a 10-month record of $93.23 after rising 1.5%.
The impact of the increase in crude prices may be stiff on the economy as gasoline prices would likely spike as well. This could worsen the ill effects of inflation as the economy continues to reel under the continuous interest rate hikes initiated by the Federal Reserve over several months.
The US already saw its highest monthly consumer prices index (CPI) increase for this year in August as core inflation continues to rise. Increases were recorded across several sectors, including food at 0.2%, shelter at 0.3%, and energy at 5.6%. Furthermore, airfares climbed 4.9%, while transportation increased by 2%. Overall, the CPI rose 3.7% from 2022, and 4.3% excluding food and energy.
Production Cuts to Cause Supply Deficit
According to a recent report from the International Energy Agency, Russia and Saudi Arabia will stretch their reductions in oil output until the end of this year. The agency says this will create a considerable shortage for the rest of 2023:
“From September onwards, the loss of OPEC+ production… will drive a significant supply shortfall through the fourth quarter.”
Early last month, oil giant Saudi Aramco announced a 38% decline in net profit for Q2, totaling 112.81 billion riyals, or $30.07 billion. According to a filing submitted to Tadawul, the Saudi stock exchange, the company blamed the revenue plunge on reduced crude prices and the pressure on refining. Although profits were reduced, Saudi Aramco increased dividend payments, declaring a total of $19.5 billion to shareholders. The company will also pay out dividends linked to performance over six quarters. Payments will begin in Q3 with a $9.9 billion disbursement.
Goldman Sachs Predicted Increase in Oil Prices
The current events may have been predicted by American investment banking and financial services company Goldman Sachs (NYSE: GS) in July. The company said it expects oil demand to hit an all-time high, adding that this would lead to an increase in crude prices. According to Goldman Sachs Head of Oil Research Daan Struyven, the record demand would cause “pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high.”
Struyven noted that Goldman Sachs increased its price target for Brent crude from $50 at the time to $86 per barrel. The forecasts for WTI and ICE Brent Crude were $76.73 and $80.75, respectively.
The Goldman Exec also spoke about crude oil production in the US. He noted that production had soared to 12.7 million barrels per day in the twelve months to July. Following this, he predicted a reduced growth movement till the end of 2023 and a forecast of only 200 barrels per day.
Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge.
When he’s not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.