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The oil price rally is near its limits according to new research that warns "gravity cannot be ignored long term".
Norbert Rücker, Head of Economics & Next Generation Research at Swiss bank Julius Baer, says his team is turning cautious on oil prices as current levels appear to be defying fundamental dynamics.
"The Saudi cuts are largely compensated by its peers including Iran, and China is unlikely to add much to global oil demand growth going forward, given its economic challenges and its swift energy transition," says Rücker.
Oil prices have risen over recent weeks on a combination of U.S. economic resilience and better-than-expected demand from China, amidst an ongoing commitment by Russia and Saudi Arabia to restrict oil output until the end of the year.
"The USD 90 per barrel mark became too strong of a magnet for prices to ignore," says Rücker.
Above: WTI (top) and brent crude prices shown at daily intervals.
He explains the measures adopted by Saudi Arabia are a blunt way to prop up prices and cash flows and although Western consuming nations are comparably quiet about this in the geopolitical arena they are believed to be using their influence "behind the curtains".
Looking at supply dynamics reveals the situation to be 'less tight' than appears at first glance as Rücker observes the price caps on Russian oil and sanctions on Iran are only very loosely persecuted these days.
In fact, Julius Baer reckons Iranian oil export expansion appears to be compensating for more than half of the Saudi cuts.
Western know-how and capital meanwhile trickles back into Venezuela's oil business.
"Brazil and Canada's robust production growth, and the shifted expectations towards more stable US shale output, overall paint a more comfortable supply picture," says Rücker.
Oil demand dynamics are meanwhile highly reliant on Chinese demand and Julius Baer tells clients the country's current economic challenges and the swift shift towards electric mobility means it is unlikely to account for strong oil demand growth going forward.
"Oil prices in the low 90's seem to defy these fundamentals. We see more downside going forward," says Rücker.
Short-term, further upside momentum cannot be discounted, however, says Rücker. But the broader message is "the Saudi's solo effort is unsustainable, and the petronations will need to shift back to more equal output levels. Iran’s growing exports and the United Arab Emirates’ production hike next year could be the triggers."