The recent surge in oil prices, driven by supply cuts from heavyweight crude producers, has raised concerns about potential demand destruction in the long term. Brent crude futures rose to $96.01 per barrel, and some analysts predict prices could reach $100 per barrel in the fourth quarter. However, the sustainability of these high prices is questionable due to global economic fragility and incoming seasonal demand drops. While some European market participants believe buyers can withstand high prices without reducing refinery output, others doubt that triple-digit oil prices can be maintained. The possibility of demand destruction arises when customers respond to persistently high prices with fewer purchases.
The support for high oil prices comes from voluntary supply cuts implemented by some OPEC+ members and additional cuts pledged by Saudi Arabia and Russia. These measures have led to tightening availabilities of high-density and high-sulfur crude, posing challenges for Western buyers to produce certain refined products. Nevertheless, refinery margins have remained attractive, and some refiners have even lightened their seasonal maintenance to take advantage of the high prices. The upcoming hurricane season and increased travel during Thanksgiving and winter vacations could further boost the demand for refined oil products in the West. However, uncertainties remain regarding China fuel export quotas and Russia’s ban on fuel exports due to ongoing sanctions.
Despite the recent increase in oil prices, doubts persist about their sustainability in the long run. Some market participants question whether prices above $100 per barrel can be maintained, citing possible demand destruction as customers respond to high prices by reducing purchases. Steep backwardation, where current prices exceed future ones, further discourages stocking refined products, leaving the market vulnerable to disruptions. The G7 has imposed restrictions on non-G7 buyers, allowing them to import Russian crude at or below $60 per barrel, while Moscow has been using its own dark fleet to sell Urals crude at significant discounts to benchmark oil prices. The White House, which has previously urged OPEC+ to increase output, has been relatively silent on the recent production declines. The upcoming OPEC+ technical committee meeting is not expected to result in policy changes. Given the limited options available to the US, it remains uncertain whether energy will re-enter the diplomatic agenda in discussions with Saudi Arabia, especially as they seek to normalize ties with Israel.