The recent voluntary extension of oil supply cuts by Russia and Saudi Arabia until the end of 2023 has had a notable impact on global oil prices. These two major oil exporters have been instrumental in tightening the oil market, a move that analysts see as bullish for prices. After the announcement, Brent crude futures rose by over 1.5% above $90 a barrel, while U.S. West Texas Intermediate (WTI) crude futures increased by a similar percentage to $86.5 a barrel. This was an extension beyond market expectations, as most investors had anticipated the supply cuts to only last through October.

To put the figures into perspective, Saudi Arabia has committed to extending its voluntary oil output cut of 1 million barrels per day (bpd) for an additional three months, bringing it to the end of December 2023. Russia, on the other hand, decided to reduce its oil exports by 300,000 bpd for the same period. These cuts are on top of the cuts agreed upon by OPEC+ producers, which extend to the end of 2024. It’s worth noting that Saudi Arabia needs Brent crude to trade at around $81 a barrel to balance its budget, according to the International Monetary Fund. Russia, meanwhile, has a lower range for profitability but seeks to boost revenues to support its ongoing war efforts in Ukraine.

Given the current supply constraints and future uncertainty, oil prices are likely to remain elevated in the short term. Rystad Energy estimates that global liquid fuel demand will surpass supply by around 2.7 million bpd in the next quarter. The front-month Brent futures traded near 9-month highs, signaling strong market sentiments about the near-term supply shortages. However, the annual refinery maintenance period in the U.S. during September and October could limit demand, acting as a restraining factor. Looking ahead, the OPEC+ group is expected to review its production policy for early 2024 in a meeting scheduled for November. Their decision will play a crucial role in shaping oil market dynamics and price action.