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New Alliance in Oil Markets Is Driving Prices Higher

Published 2023-09-13, 11:01 a/m
LCO
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Oil prices are on the rise once again. US crude managed to break above a key resistance back in late August and has been steadily making its way towards the $90 mark, with Brent crude trading above $92 per barrel for the first time since November.  
 
Much of the focus recently has been on Saudi Arabia’s persistence in cutting production, which is limiting the supply of oil and therefore pushing up its price. The latest market report from OPEC shows that the cartel is expecting to have a supply deficit of three million barrels per day going forward.  
 
While the Middle Eastern kingdom is one to focus on, markets may not be doing it for the right reasons. Saudi Arabia and Russia have started to behave in a way that suggests a strategic partnership, with the goal likely to be to move away from US dependency.

In fact, if we wind back to February last year when Russia invaded Ukraine and energy prices soared, many were expecting US consumers to suffer the consequences of higher energy costs. Whilst the cost of living did eventually increase, the US government was able to minimise the blow by releasing reserves from its Strategic Petroleum Reserves (SPR), which was built up for such a situation. This meant that the Western World was not held ransom to higher oil prices. 
 
But once the inventories have been drawn down, they cannot be used again unless they are replenished. US inventories are much lower than where they were 18 months ago.

So, not only does Saudi Arabia need to raise oil prices to keep up its recent spending spree in the sporting world – of which Ronaldo and Neymar are a big part of the bill – it also seems to be sending a “we do not need you” message to the US as it finds new markets in the east and creates a strategic alliance with Russia, who is also reducing their export production. 
 
So much focus has been on geopolitics recently – not surprisingly as it has been the main driver in oil prices in the past few years. But what is happening to demand? If we look back 15 years, oil prices were spiking as markets believed that the point of maximum supply was nearing as fossil fuels were thought to be finite. Flash forward a decade, and new forms of drilling in the US has debunked that theory. But new beliefs are emerging, suggesting that demand for oil could now be reaching its peak as renewable energy sources make the world less oil intensive. 
 
This would suggest a drop in prices as supply would eventually outweigh demand, but so far, the market dynamics are showing a different picture. Who knows, this may be a story for another day.

We’ll have to see if this recent rally proves to be more durable than the others. So far, WTI is up almost 15% since the end of August, but the rise amounts to over 30% if measured since breaking out from the sideways range back in June. The RSI on both WTI and Brent is venturing into the overbought territory, pushing beyond the peaks seen throughout the past rallies.

In fact, the RSI had reached a pattern where it was being rejected just below the 70 mark before staging a reversal in price. For now, this trend seems to be broken with the next big test of risk appetite at the $90 mark for WTI and the $95 mark for Brent. Whilst the path of least resistance is strengthening to the upside, traders should be aware of the high volatility conditions in oil markets, which can stage a significantly quick reversal within a bullish pattern, so a sound risk strategy is advised.  

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