A potential oil price rally to $100 per barrel raises questions over demand destruction

'The self-fulfilling prophecy means that at a particular point of time comes a tipping, and then there's a fall of demand,' India's energy minister warned.

A potential oil price rally to $100 per barrel raises questions over demand destruction

Prices have risen to near $100 per barrel due to a combination of increased demand and reduced supply from heavyweight producers.

Some buyers say they can survive the high price storm without reducing refinery production runs. This is because refinery margins are high.

CNBC polled European market participants who doubted that triple-digit oil price levels are sustainable on the long run. Some pointed to possible demand destruction.

Oil prices have been driven near $100 per barrel by the supply cuts of heavyweight producers. This has led some to speculate about future demand destruction.

Brent crude futures increased 63 cents a barrel since the settlement on Thursday to $96.01 a barrel at 11 am London time on Friday. This is well above the prices seen in the first six months of the year.

Some analysts warn that the gains may be short-lived. Sushant Gupta said on Monday that "there are signs that we may see $100 per barrel by quarter four," however, he warned that the global economy's fragility, and seasonal demand declines in the first three months would make that unsustainable.

On a Friday Report

Analysts at ING signaled that the oil market was "clearly overbought."

Saudi Arabia and Russia have pledged to remove 1 million barrels of production per day and export 300,000 barrels of oil per day until the end this year.

Analysts say this adds to the picture of an improving Chinese demand.

Soon, the peak could be reached


Inventory drops


Some people say that buyers can withstand the high price storm. Seven European traders and refiners, who spoke anonymously because of contractual obligations to CNBC, said that local buyers could withstand triple-digit oil prices without lowering production runs. All sources pointed out that the refining margins were firm, which means the difference between refined products' value and the price for the crude feedstock used to produce them was favorable.

The future of China's fuel export quotas is uncertain, and Russia's ban on fuel exports for an indefinite period -- that Europe cannot buy because of sanctions imposed after Moscow's invasion of Ukraine at full scale -- has reduced the availability of refined products. This could worsen global shortages of diesel. The sanctions-disrupted Russian crude access and OPEC+ cutbacks have reduced the availability of high-density, high-sulfur oil to Western buyers. This has made it more difficult for them to produce certain refined goods.

One refiner reported that the margins on refineries have been so attractive, some refiners are reducing their seasonal maintenance in order to benefit from them. As Thanksgiving and winter holidays boost travel to the U.S., Europe and Asia, refined oil product demand in the West could remain strong.

The U.S. Energy Information Administration estimates that a hurricane with a high impact this year may result in a temporary reduction of offshore crude oil production by about 1.5 million barrels a day (b/d), and a similar temporary reduction of refining capacities.

In July,


Outages of this magnitude could raise the average monthly retail price for gasoline in the United States by 25 cents to 30 cents.

'Self-fulfilling prophecy'

CNBC polled European market participants who doubted that triple-digit oil price levels are sustainable on the long run. Three pointed to possible demand destruction, where customers slowly respond to persistently high prices by purchasing less. Four respondents said that demand destruction could be a concern once oil prices reach $110 per barrel.

"High oil prices are sometimes a self-fulfilling proverb,"

Hardeep Singh Puri, the Indian Energy Minister, warned that the Indian Energy Minister would be warning in August.

"The self fulfilling prophecy is that there will be a certain point in time when the demand will drop.

One source noted that steep price backwardation -- when current prices are higher than future ones -- is a key indicator to determine the viability and sustainability of storage. This discourages the stocking of refined products leaving the market susceptible to disruptions.

In a note published on Thursday, UBS Strategist Giovanni Staunovo stated that "OPEC+'s production cuts are yielding fruit, lowering inventories and supporting the prices." The bank estimates oil to cost between $90-100 a barrel in the next few months.

Despite sanctions, the oil price increase has benefited Moscow. According to a program of the G7 biggest global economies, non G7 buyers can only import Russian crude at or below $60 a barrel using Western shipping and insurance.

But Moscow has deployed its own dark navy

The traders claim that the flagship Urals crude from Russia is currently selling at a discount of $8-10 per barrel compared to benchmark oil, which implies a value $25 above the G7 price ceiling. The Russian energy minister did not reply to CNBC's request for comment.

OPEC+ moves

On Oct. 4, an OPEC+ Technical Committee will meet to examine the market fundamentals as well as individual production compliance. The Joint Ministerial Monitoring Committee is not able to adjust OPEC+ policies, but it can call an urgent ministerial session. Three OPEC+ delegates told CNBC, anonymously due to the sensitive nature of the discussion, that it was unlikely the upcoming JMMC will lead to policy changes.

Washington has largely remained silent on the decline in production despite its vocal pleas to OPEC+ producers. The U.S. accused Saudi Arabia of coercion in October last year. Saudi Arabia is the de-facto leader of OPEC+ and relies on oil revenues to fund its massive economic diversification projects.

The White House is faced with a delicate balance as it pushes to normalize relations between Israel and Saudi Arabia - two of its most important Middle East allies. Riyadh also showed signs of moving closer to China and Russia, after rekindling its relations with Iran via Beijing-mediated discussions and being invited to join the BRICS alliance. The recent spate of high-profile U.S. officials visiting Saudi Arabia suggests ongoing talks, though it is not clear if oil will be re-introduced to the diplomatic agenda.

Helima Crock, RBC's Head of Global Commodity Strategy, said that "we clearly see the momentum" of Brent at $100 per barrel, and stressed that the U.S. has few options.

Will there be a component on energy in a possible U.S.Saudi agreement? She said that the Saudi government would like to see more Saudi barrels available on the market. "Look, this administration has few options in order to bring down prices," she added.

"They have already released the Strategic Petroleum Reserve, but the question is, will they do more? They've made deals with Iran, yet those barrels are on the market. It's unclear where the administration plans to go next for additional barrels."