By Reuters
Oil prices surged about 2% on Tuesday to their highest since November, after Saudi Arabia and Russia extended their voluntary supply cuts to the end of the year, worrying investors about potential shortages during peak winter demand.
Brent crude futures rose by $1.32, or about 1.5%, to $90.32 a barrel by 1:39 p.m. EDT (1739 GMT). The global benchmark, used to price over three-quarters of the world’s traded oil, rose to $91.15 per barrel earlier in the session, its highest since Nov. 17.
U.S. West Texas Intermediate crude (WTI) futures rose $1.49, or about 1.7%, to $87.04 a barrel, after also hitting a 10-month high of $88.07 earlier in the session.
Investors had expected Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.
“Certainly the market was caught off-guard by the aggressiveness of their stance,” said John Kilduff, partner at Again Capital LLC in New York.
Both Saudi Arabia and Russia said they would review the supply cuts monthly, and could modify them depending on market conditions.
“With the production cut extended, we anticipate a market deficit of more than 1.5 million barrels per day in 4Q23,” UBS analyst Giovanni Staunovo wrote in a note to clients. UBS now expects Brent crude to rise to $95 a barrel by year-end.
Reflecting concerns about the short-term market supply, front month Brent and WTI contracts were also trading at their steepest premium since November to later-dated prices. This structure, called backwardation, indicates tightening supply for prompt deliveries.
Also supporting oil prices on Tuesday, Goldman Sachs said it now sees the probability of a U.S. recession starting in the next 12 months at 15%, down from an earlier forecast of 20%.
Along with the Saudi supply cuts, which began in July, prospects of the U.S. economy avoiding a hard recession have helped lift oil demand and prices in recent months.
Both Brent and WTI futures have gained more than 20% since the end of June.