Oil prices near $100 per barrel raise questions over demand destruction

Supply cuts from heavyweight crude producers have helped drive oil prices near $100 per barrel — fueling some to consider the potential for future demand destruction.

Brent crude futures rose 63 cents per barrel from the Thursday settlement to $96.01 per barrel on Friday at 11 a.m. London time and sit well above prices observed in the first half of the year.

The gains could prove short lived, some analysts warn. Sushant Gupta, research director of Asia refining at Wood Mackenzie, on Monday said “there are all signs that we could potentially see $100 per barrel in quarter four,” but warned that global economic fragility and incoming seasonal demand drops in the first quarter would make this unsustainable long term. In a Friday report, ING analysts signaled the oil market is “clearly in overbought territory.”

At the heart of price support are a series of voluntary cuts that fall outside of the official policy of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+. First is a 1.66 million-barrel-per-day decline implemented by some OPEC+ members until the end of 2024. Topping this, Saudi Arabia and Russia pledged to respectively remove another 1 million barrel per day of production and 300,000 barrels per day of exports until the end of this year.

This adds to a picture of improving Chinese demand — which analysts say could soon peak — and inventory drops. 

Some say buyers can weather the storm of high prices. Seven European refiners and traders, who spoke under anonymity because of contractual obligations, told CNBC that local buyers can withstand oil prices veering into triple digits without lowering their output runs. All of the sources pointed to firm refining margins, meaning the difference between the value of refined products and the price of the crude feedstock to generate them is favorable.

Uncertainty lingers over further China fuel export quotas, while Russia’s indefinite ban of its fuel exports — which Europe cannot purchase because of sanctions that followed Moscow’s full-scale invasion of Ukraine — has tightened availabilities of refined products and could particularly worsen global diesel shortages. Sanctions-disrupted access to Russian crude and OPEC+ cuts have shrunk availabilities of high-density and high-sulfur crude to Western buyers, encumbering their task to produce certain refined products.

Refinery margins so far have nevertheless been attractive enough that some refiners have lightened their seasonal maintenance to take advantage, one refiner said. Refined oil product demand could yet stay strong in the West, as Thanksgiving and winter vacations boost travel in the U.S. and Europe, and the hurricane season looms — which can historically disrupt both local refining and crude production. 

“We estimate a high-impact hurricane event this year could result in a temporary loss of monthly offshore crude oil production of about 1.5 million barrels per day (b/d) and a nearly equivalent temporary loss of refining capacity,” the U.S. Energy Information Administration said in July.

“Outages on that scale could increase monthly average U.S. retail gasoline prices by between 25 cents per gallon and 30 cents per gallon.”

Some European market participants polled by CNBC doubted triple-digit oil prices are sustainable in the long term, with three pointing to possible demand destruction — where customers gradually answer persistently high prices with fewer purchases. A fourth said demand destruction is a potential question, once prices hit $110 per barrel.

“Sometimes high oil prices can become a self-fulfilling prophecy,” Indian Energy Minister Hardeep Singh Puri warned in August. “The self-fulfilling prophecy means that at a particular point of time comes a tipping, and then there’s a fall of demand.”

One of the market sources also noted that steep backwardation — where current prices exceed future ones and a key metric to assess the viability of storage — discourages stocking refined products, leaving the market vulnerable to any disruptions.

“OPEC+ production cuts, including the voluntary extra cut by Saudi Arabia, are bearing fruit, lowering oil inventories and supporting prices,” UBS Strategist Giovanni Staunovo said in a Thursday note, pegging the bank’s oil price estimate at $90-100 per barrel over the coming months.

The oil price hike has benefitted Moscow despite sanctions. Under a program by the G7 largest global economies, non-G7 buyers may only use Western shipping and insurance to import Russian crude purchased at or below $60 per barrel.

But Moscow has been deploying its own dark fleet, and traders say Russia’s flagship Urals crude currently sells at roughly $8-10-per-barrel discounts to benchmark oil prices, implying values $25 per barrel above the G7 price cap. The Russian energy ministry did not respond to a CNBC request for comment.

An OPEC+ technical committee meets on Oct. 4 to review market fundamentals and individual production compliance. While incapable of adjusting OPEC+ policy, the Joint Ministerial Monitoring Committee can call an emergency ministerial meeting to do so. Three OPEC+ delegates, speaking anonymously because of the sensitivity of the discussions, told CNBC it is unlikely this upcoming JMMC meeting will result in policy tweaks.

The White House has previously vocally entreated OPEC+ producers to hike output, ease prices at the pump and alleviate inflation — but Washington has been largely silent in response to the production declines. In October last year, the U.S. levied accusations of coercion over other OPEC+ members against de-facto group leader Saudi Arabia, which depends on oil revenues for its economic diversification giga-projects.

The White House faces a difficult balancing act, as it pushes for a normalization of ties between Israel and Saudi Arabia, two top allies in the Middle East. Riyadh has also shown signs of steering closer toward China and Russia after rekindling relations with Iran through Beijing-mediated talks and receiving an invitation to join the emerging economies’ BRICS alliance. A spate of high-profile U.S. official visits to Saudi Arabia over the summer suggests ongoing discussions — though it remains to be seen if oil re-enters the diplomatic agenda.

RBC Head of Global Commodity Strategy Helima Croft, who says “we clearly see momentum” for Brent at $100 per barrel, stressed the absence of many options left in the U.S. toolkit.

“Will there be an energy component of a potential U.S.-Saudi deal? I think the Saudi administration would clearly like more Saudi barrels on the market, because, look, there are not a lot of great options for this administration to get prices down,” she said on Wednesday.

“They’ve already done the big [Strategic Petroleum Reserve] release, the question is are they really going do more … they’ve done deals with Iran, but those barrels are already in the market, so it’s not clear where the administration goes next for additional barrels.”