After Saudi Arabia declared it would reduce output if the US-Iran deal were approved, crude oil rose from $86 to $93 per barrel. The agreement will deliver 1 million barrels per day of oil to the market; before August 17, petroleum was in free fall due to concerns about the destruction of demand caused by the impending recession and the US-Iran deal’s progress. Although there is market tightness, it is not as severe as the market had anticipated after the West decided to ban Russia and its oil.
Russian oil, flowing to Europe, is now rushing to Asia, while Middle East oil is flowing to Europe, which was earlier flowing to Asia. So there is no shortage of oil which can be seen that the premium from next month’s contract has eroded. However, not all is bad news for oil bulls, and one includes 35-year low US Strategic reserves.
The US will stop selling its strategic reserves on the open market in September, and hurricane season will begin the following month. Any disruption will hamper petroleum and natural gas production in the Gulf of Mexico.
There is no spare capacity, and there are few stocks. No new oil sources exist because neither OPEC nor US Shale has any excess capacity owing. This is due lack of investment, and they both made this clear. After producing 2.84 million BPD less in June, OPEC+ missed its output goal by 2.9 million BPD last month. These capacity restrictions and some OPEC members’ difficulties in increasing production appear to be the causes. As previously agreed with OPEC, Russia has also not boosted production since March.
Price Range
Crude oil has officially entered technical neutrality because it is trading above its 200-day moving average. Prices have now, for the first time since June 29, closed above the 20-day moving average. Due to supply restrictions and OPEC+’s readiness to reduce production, any deal will cause a knee-jerk reaction to the downside. But it is unlikely to stay there. US Fed is on an aggressive rate hike path, and all economic indications indicate deceleration.
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