Oil prices edge higher after IEA forecasts tighter market on Opec+ cuts

US Consumer Price Index rose by 0.6% last month, outpacing July's increase of 0.2%

A pump jack and drilling rig in New Mexico. A surprise rise in US inflation stoked concerns of further monetary tightening, weighing on crude futures. Reuters

Oil prices edged up on Thursday after the International Energy Agency said Opec+ production cuts would result in a large crude supply deficit in the fourth quarter of this year.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.63 per cent higher at $92.46 a barrel at 11.31am UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.68 per cent at $89.12 a barrel.

On Wednesday, Brent settled 0.20 per cent lower at $91.88 a barrel while WTI closed down 0.36 per cent at $88.52.

“Oil prices remain elevated after energy traders read another monthly oil report that sees a tight oil market in the fourth quarter,” said Edward Moya, senior market analyst at Oanda.

The IEA has forecast a global oil demand growth of 1.5 million barrels per day in the second half of the year, compared with the first half, exceeding supply by 1.24 million bpd during that period.

“From September onwards, the loss of Opec+ production, led by Saudi Arabia, will drive a significant supply shortfall through the fourth quarter,” the IEA said.

“Unwinding cuts at the start of 2024 would shift the balance to a surplus. However, oil stocks will be at uncomfortably low levels, increasing the risk of another surge in volatility that would be in the interest of neither producers nor consumers.”

Brent crude has gained about 4 per cent since Opec+ members Saudi Arabia and Russia announced last week that they would extend supply cuts of a combined 1.3 million bpd to the end of the year.

As part of their voluntary cuts, the kingdom is extending its output reduction of a million bpd until December while Russia is rolling over its export cut of 300,000 bpd until the end of the year.

In its monthly oil market report on Tuesday, Opec said it expected a supply shortfall of 3.3 million bpd over the next three months.

The group also stuck to its oil demand outlook for this year and the next, and said China’s recent stimulus measures would help to revive economic growth.

"Our price outlook needs to reflect the fact that the Opec+ focus is more about price optimisation than price stability, and with that in mind, the short-term risk of a Brent move above $95 cannot be ruled out," said Ole Hansen, head of commodity strategy at Saxo Bank.

"With inflationary pressures from higher energy prices on the rise again, the timing of peak rates may suffer another delay while later rate cuts may end up being less than expected."

A surprise increase in US inflation stoked concerns of further monetary tightening, weighing on crude futures.

The Consumer Price Index rose by 0.6 per cent last month, after increasing by 0.2 per cent in July and by 3.7 per cent on an annual basis, the Labour Department reported on Wednesday.

Core CPI – which excludes petrol and food – rose 0.3 per cent last month, slightly higher than the expected 0.2 per cent. Still, it cooled on an annual basis as core CPI rose 4.3 per cent, down from 4.7 per cent in July.

“The August inflation print is unlikely to push the Federal Reserve to hike next week but we think it will, nevertheless, keep a hawkish bias to commentary,” said Edward Bell, senior director of market economics at Emirates NBD.

“We expect the Fed to keep rates on hold until the end of H1 [first half] 2024.”

After pausing its tightening cycle in June, the Fed increased its policy rate in July for the 11th time since March 2022, as it aims to bring inflation down to its 2 per cent target range. It is set to meet next on September 19 and September 20.

Fed chairman Jerome Powell has said the central bank may not be done raising interest rates, arguing more proof is needed to show a cooling economy.