Experts predict oil prices will continue to rise heading in the fourth quarter, driven by tighter supply and production cuts. Despite some profit taking in the last week of September, crude oil prices have rallied since the summer. Global benchmark Brent crude has added 6.1% from the start of the year, while West Texas intermediate has climbed nearly 12%. Those gains came despite oil prices that struggled to break above $75 per barrel for much of the year until output forecasts declined. .GSPE YTD mountain The energy sector was the strongest performing segment of the S & P 500 in September. The focus has been on oil supplies. Saudi Arabia in September extended a voluntary production cut of 1 million barrels per day, which added to other limits OPEC put in place and helped push benchmark Brent crude above $90 per barrel. Saudi Arabia’s most recent output cut brings the nation’s total production to about 9 million barrels per day through the end of the year. Russia, which is a member of the OPEC+ cartel, said it would voluntarily trim supply by about 300,000 bpd and extend the cuts through December. In the wake of these announcements, Goldman Sachs raised its 12-month forecast for Brent crude to $100 per barrel from $93, and also stepped up its forecast for West Texas Intermediate crude, the U.S. benchmark, to $95 per barrel from $88. Bank of America is even more bullish , projecting crude oil prices will climb past $100 per barrel before the end of this year. XLE YTD mountain the Energy Select Sector SPDR Fund includes oil heavyweights like Chevron and ExxonMobil. On Wednesday, inventory reports showed crude stockpiles declined 2.2 million barrels to 416.3 million barrels last week. The bigger drawdown than expected means reserves at the nation’s storage site in Cushing, Oklahoma, fell to its lowest level since the middle of 2022. That means U.S. crude oil reserves will remain under pressure amid the Saudi production cuts. “I would say that the two main trends underpinning the oil price rally are Saudi Arabia’s production cuts and extremely high refinery margins, in particular diesel cracks have been outstanding this year,” said Viktor Katona, lead crude analyst at Klepr. “The key issue with Saudi Arabia cutting its supply to 9 mbpd [million barrels per day] is that by doing so, global supply of medium sours has gone down.” Most refiners across the globe are best configured for medium-density crude oil, Katona said. While Saudi Arabia has cut production, countries in the Middle East including Kuwait and Iraq have ramped up refining capacity, which means the global supply of this type of crude will be lower elsewhere. “There remains a sizable deficit in the fourth quarter about 1 million bpd, but this could quickly increase once the full impact of the ongoing extra cuts from Saudi Arabia and Russia are realized,” said Stephen Ellis, energy and utilities strategist at Morningstar. Ellis said that $100 per barrel for global benchmark Brent prices is both within striking distance and could be easily surpassed. Saxos Bank head of commodity strategy Ole Hansen, meanwhile, expects $100 per barrel will be short-lived, with oil prices declining to the $80 range in 2024 as OPEC+ “will have to show its commitment to stable/higher prices.” “The risk of reaching $100 before year-end is real but after that we are likely to see macroeconomic headwinds intensify, with the combination of rising fuel costs, lower consumer sentiment and the damaging bear steepening of the U.S. yield curve hurting economic activity in the months ahead,” Hansen said. Ellis said Saudi Arabia stands alone in its purpose for continuing to extend supply cuts. Russia is more likely to be short-term oriented, he said, in order to continue using the revenue from higher oil prices to fund the war in Ukraine. “The main drivers probably remain the same, we’re looking at a traditional supply and demand dynamic,” said Brian Mulberry, director and client portfolio manager at Zacks Investment Management. The prospect of cold winter months increasing heating oil use will also support higher prices, Mulberry said. “It’s likely to be another difficult winter, [while] the demand goes up and puts more support on prices,” he said. Other analysts were less convinced that the cold winter months would be as much of a global headwind compared with 2022, following the onset of Russia’s invasion of Ukraine, which spiked energy prices. Contributing factors also include the Federal Reserve, which has signaled benchmark interest rates could remain higher for longer than previously anticipated. Climbing interest rates would in turn increase borrowing costs and lower oil demand if realized. And questions still remain as to the strength of a resurgence from the Chinese economy and how that will support higher oil prices. “The extension of the cuts would imply that Saudi Arabia remains highly concerned about Chinese oil demand growth essentially peaking in the first half of the year, higher supply from Iran, and its desire to fund its expensive social plans,” Ellis said. Mulberry said he is focusing his oil stock picks on those that have ample refining exposure like ExxonMobil and ConocoPhillips . XOM COP YTD mountain ExxonMobil and ConocoPhillips stock. “For us, it’s about running at capacity, and those refiners have been operating at 100% capacity since the Covid-19 shutdown was lifted, which is a durable way to play the sector,” he said. “[There’s also] more development in terms of exploration.” Goldman Sachs also recently published its list of buy-rated stocks to play higher oil prices, which included Chevron and Baker Hughes . Goldman analyst Neil Mehta said the firm turned bullish on Chevron after its perceived underperformance so far in 2023, and sees shares added 16% from current levels. Chevron stock is down more than 7% from the start of the year, On Baker Hughes, Mehta forecast as much as 19% upside thanks to a company turnaround, which has helped the oil services stock add 17% from the start of the year.