Oil prices rose a dollar a barrel on Tuesday to their highest since November, after Saudi Arabia and Russia extended their voluntary supply cuts to the end of the year, worrying investors about potential shortages during peak winter demand.
Brent crude futures rose by $1.04, or 1.2%, to settle at $90.04 a barrel, closing above the $90 mark for the first time since November 16, 2022. U.S. West Texas Intermediate crude October futures gained $1.14, or 1.3%, to settle at $86.69 a barrel, also a 10-month high.
Investors had expected Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.
"This is a clear indication that oil prices trump volume (for Saudi Arabia)," said Jorge Leon, senior vice president at Rystad Energy.
"These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide," Leon added.
Both Saudi Arabia and Russia said they would review the supply cuts monthly, and could modify them depending on market conditions.
"With the production cut extended, we anticipate a market deficit of more than 1.5 million barrels per day in 4Q23," UBS analyst Giovanni Staunovo wrote in a note to clients. UBS now expects Brent crude to rise to $95 a barrel by year-end.
Reflecting concerns about the short-term market supply, front month Brent and WTI contracts were also trading at their steepest premium since November to later-dated prices. This structure, called backwardation, indicates tightening supply for prompt deliveries.
Also supporting oil prices on Tuesday, Goldman Sachs said it now sees the probability of a U.S. recession starting in the next 12 months at 15%, down from an earlier forecast of 20%.
Along with the Saudi supply cuts, which began in July, prospects of the U.S. economy avoiding a hard recession have helped lift oil demand and prices in recent months.
Both Brent and WTI futures have gained more than 20% since the end of June.