Why This Could Be The Next Price Target For Oil

Crude oil is trading near a 10-month high at $95 a barrel. Brent crude oil, the global benchmark, has gained roughly 30% since June.

West Texas Intermediate (WTI), the U.S. benchmark, is on pace for its fourth consecutive weekly gain, and is up about 27% this quarter, pushing gasoline prices to an 11-month high.

And we’re just getting started…

In addition, the price of diesel has soared even faster, especially in Europe. Distillates such as diesel, gasoil, and heating oil are the primary fuels used by the industrial economy. Inventories were severely depleted in August—U.S. distillate fuel oil inventories were 23 million barrels, or 16% below the prior ten-year seasonal average in August. The deficit to the prior ten-year average has widened since March and April, putting strong upward pressure on prices.

The rising price of oil is also hitting the financial markets. The S&P 500 is down about 3% since hitting a high in July, as investors fear energy prices could re-accelerate inflation and stifle growth. The sell-off has been even more acute in the bond market, with the yield on the 10-year Treasury on Tuesday hitting a high not seen since 2007.

Why Oil Is Rising Again

There are two reasons for the recent jump in oil prices: first, Saudi Arabia and Russia extended production cuts to the end of the year, removing more than a million barrels a day from the market. This will likely leave the global oil markets short about three million barrels a day in the fourth quarter.

The second reason is a resilient global economy. Demand—particularly from China—remains robust. This is happening despite Wall Street telling everyone how a recession is just around the corner.

Despite fears about economic weakness in China, its crude oil imports rose to 11.5 million barrels per day in August, according to Rystad Energy—two million barrels a day higher than this time last year!

That sort of leap leaves this year’s forecast world demand growth for oil looking too conservative. The International Energy Agency forecast put oil demand growth for 2023 at 2.2 million barrels a day.

Let’s take a closer look at some specific numbers for oil, from an article by Reuters John Kemp. Kemp reports that those extra production cuts announced by Saudi Arabia and Russia will have removed a total of 125 million barrels of crude from the market by the end of September and 245 million by the end of December, if implemented in full.

Meanwhile, the economic outlook here in the U.S. has improved. We have faster growth, a lull in inflation and the prospect the Fed will pause its campaign of interest rate rises.

Less oil being produced and greater consumption have combined to…

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