Why Are Oil Prices So High Right Now?

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Oil prices are the talk of Wall Street at the moment. Indeed, Saudi Arabia and Russia’s production cut extension as well as Brent oil’s recent nine-day climbing streak have drivers and oil producers alike considering the implications of an imminent hike in fuel costs.

Why are oil prices so high right now?

Well, in the near term, it appears oil futures are pricing in a number of bullish factors. Saudi Arabia and Russia remain the second- and third-largest producers of oil in the world, respectively. As such, their announcement earlier this week that they will continue to limit production through year-end has many investors convinced oil is heading north for the winter. In total, the two nations will cut their production by about 1.3 million barrels of oil per day.

According to an unnamed Energy Ministry official from Saudi Arabia, the move comes as an effort to “balance” the oil market. That said, many analysts agree that the production cut is a thinly veiled effort to increase profit. Per a Saudi Press Agency report:

“This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets.”

Evidence is already in favor of rising oil prices. Recently, Brent crude prices went on a nine-day winning streak, the longest period of consecutive gains since early 2019. Brent crude is up more than 5% year-to-date (YTD) as of this writing, trading at about $90 per barrel. All of this has many analyst forecasting a rapid rise in oil prices coming sooner than you may expect.

Per RBC Capital Markets analyst Michael Tran:

“Our figures suggest tightness through the balance of the year, as Riyadh and Moscow remain committed to output cuts.”

How High Will Oil Prices Climb?

While analysts are split over the height of the eventual peak of the artificially tightened oil market, most agree the price of crude is bound to rise.

Swiss bank UBS recently stated that it sees U.S. crude prices climbing 6% through the end of the year. This would push the West Texas Intermediate (WTI) benchmark up to $91 a barrel by the end of 2023. For context, the WTI is currently at around $87 a barrel.

“While oil prices have rallied recently, oil markets look likely to remain in deficit over the upcoming months, and we still see scope for crude oil prices to rise further,” wrote Mark Haefele, Chief Investment Officer of UBS Global Wealth Management.

Others are even more pessimistic over the effects of Saudi Arabia and Russia’s supply cuts. Goldman Sachs recently issued a warning that oil prices could spill into triple-digit territory in 2024 if the two countries don’t cease their production limitation.

“Consider a bullish scenario where OPEC+ keeps the 2023 cuts […] fully in place through end-2024 and where Saudi Arabia only gradually raises production,” Goldman Sachs analysts noted.

This would presumably have a notable effect on gas prices, which have also been moving upward recently.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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