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Oil Clears $80 as OPEC Meeting Looms

Stavros Tousios | Wednesday 02 August 2023

Oil prices accelerated to a 3-month high after reports of a substantially larger-than-expected drop in US crude oil inventories. Data from the American Petroleum Institute (API) released on Tuesday, August 1, showed that oil inventories probably fell by 15.4 million barrels, the largest inventory decline recorded since 1982. Analysts expected a drawdown of just 0.9 million barrels for that period, following an inventory build of 1.319 million barrels the week prior.

An illustration of Oil prices going up

Brent crude (EB) prices ticked about 0.6% higher to $85.73 per barrel by the end of the day on Tuesday, while West Texas Intermediate (WTI) Oil (CL) prices appreciated by about 0.54% to reach $82.14 per barrel. These were the highest prices seen in the two commodities since April of this year.

An Image of Oil price charts from the beginning of 2023 up until 02/08/23

Nonetheless, oil inventories in other parts of the world have also been on a declining pattern, with demand outpacing supply. As a matter of fact, oil production has been constrained by cuts perpetrated by Saudi Arabia, the de facto leader of the OPEC cartel.

US Inventory Situation

In response to expectations that oil prices would continue to rise, the White House withdrew its offer to buy 6 million barrels of oil to replenish the Strategic Petroleum Reserve (SPR). The Department of Energy (DOE) will confirm the inventory levels later today, Wednesday, August 02, with its EIA report. As of the time of writing, the DOE did not report any change in the levels of SPR inventories for the third week in a row.

The latest inventory data support projections that oil demand will remain steady while global output will weaken, supporting crude prices. Before the data release, crude prices had seen small losses, owned to a stronger dollar and some profit-taking during market hours trading on Tuesday, as investors weighed in on the recession prospects. The API data showed that demand remained robust in the world's largest oil consumer, the US, which offset concerns about demand elsewhere.

The State of Affairs in China

Economic headwinds in China might have led to a peak in the country's demand for fuels and oil-derived products such as plastics. Analysts suggest China's demand for diesel and gasoline (RB) is unlikely to reach pre-pandemic levels this year. The country has maintained robust imports, but the supply has been stockpiled instead of refined for consumption. 

Analysts believe China's oil demand likely peaked at 16.4 million barrels per day in the second quarter. They also suggest that the Asian giant's demand would fall to 15.8 million barrels per day in the current quarter but probably manage to tick to 16.2 million barrels per day in the final quarter of the year. Evidence of the weakness in demand is seen in diesel, as a key industrial fuel used across multiple sectors. China has increased exports of diesel as well as built-up stockpiles due to slowing domestic consumption.

Upcoming OPEC Meeting

China is the world's largest importer of crude oil and has been struggling to maintain its post-covid recovery. Partially in an attempt to offset a potential decline in demand from China, Russia, and Saudi Arabia have been making large cuts to production in an effort to raise crude prices. Thus, supply is expected to tighten significantly in the second half of this year.

OPEC will meet on Friday, August 4,  and it's widely expected that Saudi Arabia will extend its current production cuts through September. Goldman Sachs (GS) recently raised its price outlook for crude oil, citing supply restrictions and a potential recovery in Chinese demand thanks to its government's stimulus measures. 

On the other hand, while agreeing that oil prices might rise, other analysts do not believe they will exceed $90 per barrel, citing recessionary pressures in other regions such as Europe. Accordingly, they see increased summer demand pushing prices higher for now but expect the upward trend to end when the summer season is over. 


Oil prices jumped about 0.54% after the API predicted the largest drop in inventories since records began. Inventories outside of the US have also seen declines as demand outpaces supply following deep cuts by Saudi Arabia. Saudi Arabia is expected to extend its voluntary cuts when OPEC meets on Friday. (Source: CNBC)

While oil has risen to fresh multi-month highs following the surprise draw, traders might want to keep a close eye on Friday’s developments as it could provide them with the necessary insights to allow them to make more informed decisions.

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