Brent surge continues

All eyes are set on two crucial monthly reports due later this week – by the US Energy Information Administration (EIA) and Opec, as international crude oil price continues to hover around the $90/bbl mark. Brent crude oil has rallied for five straight weeks, after stuttering in July and August –reaching a 10-month high. While there is strong resistance at $90/bbl, more and more voices from the fundamental analysts now voice support for oil to sustain the $90/bbl barrier.

Oil prices have seen a strong bull run, that gained momentum after Russia and Saudi Arabia, as part of the Opec Plus group, announced deeper than expected supply cuts for the rest of the year. The market has one eye on the US inflation data and Fed’s upcoming interest rate decision. There is uncertainty over the US interest rate call and a potential slowdown in US demand is also on the cards.

But no demand side pressures have so far managed to stand the ground against the relentless tightness of the market. There have been periods of reduced demand from big consumers such as China – but the response every time from the Opec Plus group has more than matched the potential demand slowdown impact.

US crude oil inventories have not shown any improvement either, as the heavy drawdown continues. The US oil rig count is still significantly lower than the same period a year ago. Shale producers have also been slow to come out of the blocks. On the other side, supply side tightness continues unabated, even though smaller Opec contributors have shown month-on-month increase in production in recent months.

Saudi Arabia’s resolve to keep oil prices favorable has never been stronger. With the Kingdom’s lofty aimbitions to fund the economy with trillions of dollars of investment before diversifying revenues –petrodollars will remain key. Russia’s unwavering support in Saudi’s bid to keep the lid on crude oil supply has now entered the second year and appears to have the legs to go as far as the two big players deem fit.

For Pakistan, oil at and around $90/bbl spells more bad news – both in terms of pressure on imports and the inflation it invites as a result of retail price passthrough of petroleum products. Coal and LNG, linked closely with Brent, have also started to inch up. From what it appears, nothing short of a mass scale demand destruction will lead to oil prices going back to the 10-year mean of $70/bbl. And do not be surprised if Opec still comes out as the winner.