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WTI Oil markets surge as production cuts, China’s economic stimulus, and a more cautious Federal Reserve policy outlook push prices to new heights.
The brief retreat in oil markets has proven to be fleeting as recent trends indicate oil prices scaling new peaks. WTI oil has confidently surpassed the $85.00 threshold, while Brent oil is steadily advancing towards the psychologically significant $90.00 level. It appears that traders have cast aside concerns of a recession and the challenges facing China’s economy. What is driving these developments?
OPEC+ Determined to Bolster Prices
OPEC+ has evidently learned from past missteps. The organization is showing restraint in boosting production at the first signs of a wti oil price uptick. Crucially, two influential members, Saudi Arabia and Russia, have compelling reasons to uphold their production cuts.
According to the International Monetary Fund (IMF), Saudi Arabia requires an average oil price exceeding $80 to balance its budget. Given the production cuts in place, the country may well need a higher price, prompting Saudi Arabia to endeavor to propel oil prices beyond the $90 mark before considering any production increases.
For Russia, the primary challenge lies in the Western-imposed oil price cap. This cap limits Russia’s access to transportation and insurance. Consequently, Russia stands to benefit from selling less oil at higher prices that exceed the cap. It is thus in Russia’s interest to extend its production cuts for an extended period.
Less Hawkish Federal Reserve Outlook on WTI Oils
Market participants anticipate that the Federal Reserve will maintain the federal funds rate at its current level for the remainder of the year. Recent remarks from Federal Reserve speakers have leaned toward dovishness, suggesting that the Fed’s aggressive rate hikes have sufficiently impacted the economy and the labor market. Should Treasury yields remain below their recent peaks, oil markets could receive additional support.
Anticipated Stimulus From China
China’s economic performance during the first half of the year fell short of expectations. Nevertheless, the country has initiated a range of stimulus measures. Chinese equities have already rebounded from their August lows, fueling optimism that these measures will offer the necessary support to the economy. If China’s economy returns to robust growth, its demand for energy is poised to increase, which bodes well for oil markets.
With a confluence of positive catalysts at play, Brent oil is expected to make strides toward the $95.00 to $100.00 range. Meanwhile, WTI oil, trading at a discount to Brent, stands a good chance of stabilizing above the $90 mark in the weeks ahead.
