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Oil Near $100 After OPEC+ Extension

Stavros Tousios | Wednesday 20 September 2023

Crude Oil (CL) hit a fresh 10-month high on Tuesday, September 19, before pulling back slightly as investors locked in some gains ahead of the widely anticipated FOMC meeting later today, Wednesday, September 20. U.S. WTI Crude futures reached a high of  $93.74 a barrel, while Brent Oil (EB) peaked at $95.96, the highest since November 2022. 

Tuesday’s spike was largely attributed to the latest stockpile data from the American Petroleum Institute (API), but the oil market has been on its way to triple digits earlier in September as OPEC+ announced an extension of production cuts to the end of 2023 earlier in the month. 

While some analysts believe the supply shortage will likely dissipate in 2024, others worry that the impact of higher oil prices might instigate a recession in the US.

An image of oil drills

What’s Driving Oil Prices Higher

It seems that oil continued its upward trend seen in the past three weeks due to indications that supply is decreasing while demand remains steady. Major OPEC+ members, Russia and Saudi Arabia, have announced that they will continue voluntary output cuts for the rest of the year, reducing the oil supply by 1.3 million barrels. 

Furthermore, last week, oil surged in light of positive macroeconomic data from China. Both manufacturing output and retail sales exceeded analysts' expectations, leading to increased optimism about oil demand. Moreover, Chinese refinery runs hit a record high in August, further fueling sentiment. In addition, OPEC maintained its positive outlook for oil demand in 2024, projecting a rise of 2.25 million barrels per day. 

On Monday, September 18, the Department of Energy (DoE) reported that the US's Strategic Petroleum Reserve (SPR) rose by 600,000 barrels last week, with the SPR inventory still at a nearly 40-year low of 351.2 million. Then, on Tuesday, the Energy Information Administration (EIA) changed its forecast for crude oil for Q4, expecting inventories to shrink by half a million barrels per day in H2 of 2023.

Further to recent optimism, expectations of tighter markets rose further on Tuesday due to a bigger-than-expected weekly draw reported by the API, sending prices around 15% higher over the 3 weeks. The API reported an inventory drawdown of more than 5 million barrels, compared to a draw of 2.667 million barrels. 

Potential Impact of Higher Prices 

Historically, when energy prices rise, they’ve led to recessions as they add to inflation while reducing consumers' purchasing power. In fact, rising costs have led to a significant spike in US consumer inflation in August.  The Fed traditionally downplays the impact of higher oil prices on inflation, focusing on core inflation that excludes food and energy costs. But with both headline and core inflation numbers jumping in August and interest rates elevated, uncertainty around the Fed’s hiking path will rise, especially since Fed Chair Jerome Powell emphasised a data-dependent approach to interest rates at his last press conference.

Energy costs are one of the significant issues affecting the Fed’s decisions. The market currently expects the Fed to keep interest rates steady during its Wednesday, September 20, FOMC, but if oil prices move past $100, it could pose a challenge to further hikes. According to a Dallas Fed study, if oil prices reach $100, there could be a significant short-term increase in headline inflation. 

What the Outlook Looks Like

The Fed may be concerned about the impact of higher oil prices on inflation, as they have been aggressively raising interest rates to combat it, but sluggish economic growth in Europe and China might put a lid on the oil rally in the coming months, as slower growth typically leads to decreased energy demand. (Source:Barron’s)

While some investors are also taking precautions against potential inflationary pressures, others are increasingly optimistic about the future of crude oil prices. Money managers still hold an overall bearish position, but the gap between bets on price declines and bets on price increases has narrowed in recent months, nearing a net neutral position. Additionally, open interest in crude oil futures has reached its highest level since May 2020 as investors allocate more funds.


Oil prices have risen in recent months as supply cut announcements have created expectations of a potential deficit in the latter part of 2023, hitting a fresh 2023 high of $93.74 a barrel before pulling back on profit-taking ahead of Fed’s decision later today, Wednesday, September 20. Some investors are favourably looking at the oil market, while others point to inflationary risks posed by higher prices and how they have led to recessions. 

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