The International Energy Agency (IEA) has issued a cautionary statement, emphasizing that the recent oil supply cuts by major producers Saudi Arabia and Russia are poised to create a “significant supply shortfall,” which in turn, may lead to renewed price volatility in the global oil market.
According to the IEA’s assessment, the latter half of 2023 is projected to witness a deficit of 1.2 million barrels per day due to the extended cutbacks announced by OPEC+ leaders last week. Although this projection is smaller than previously anticipated due to adjustments in demand estimates, it still poses potential risks for consumers.
Even if Saudi Arabia and Russia were to ease their production restrictions in early 2024, the IEA warns that oil inventories will remain severely depleted, leaving prices susceptible to sudden shocks. On Tuesday, Brent futures surged to a 10-month high, surpassing $92 per barrel.
Toril Bosoni, Head of the IEA’s Oil Market Division, underscored the tightening market conditions, noting that preliminary data from August indicated a substantial decline of 75 million barrels in global oil inventories.
While OPEC+ nations assert that their intervention aims to stabilize markets, the group’s own data, released on Tuesday, suggests an even larger supply gap of over 3 million barrels per day in the upcoming quarter, marking the largest deficit in at least a decade. The current strategy of the OPEC+ coalition has not been extensively clarified.
The IEA expressed concern that with oil stocks reaching uncomfortably low levels, there is an elevated risk of another surge in volatility, which would be detrimental to both producers and consumers, particularly in the context of the fragile economic environment. The IEA provides advisory services to major consuming countries such as the United States.
This situation potentially holds political significance for President Joe Biden, as he approaches next year’s reelection campaign with voters still grappling with a period of elevated inflation and gasoline prices hovering near $4 per gallon. Bosoni further emphasized the IEA’s apprehension about the impact of high prices on the global economy’s fragility and the pace of monetary easing.
The IEA’s latest report represents a more explicit critique of the Saudi-Russia partnership, particularly focusing on the energy disruption and inflationary surge triggered by Moscow’s conflict with Ukraine.
“The Saudi-Russian alliance is proving a formidable challenge for oil markets,” stated the Paris-based IEA in its monthly report, adding that the extension of output cuts by Saudi Arabia and Russia until year-end is poised to establish a substantial market deficit throughout the fourth quarter.
Tensions between the IEA and the producers’ group have escalated in recent years, with the IEA accusing OPEC+ of putting undue pressure on consumers, while Riyadh has dismissed the agency’s projections for transitioning away from fossil fuels.
IEA Executive Director Fatih Birol remarked on Tuesday that demand for oil may reach its peak this decade as consumers increasingly turn to renewable energy to combat catastrophic climate change. He stated, “We may be witnessing the beginning of the end of the fossil fuel era.”
The IEA, in light of its revised estimates of global oil demand for each year since 2022, which were down by 400,000 barrels per day, noted that the outlook for the expected supply deficit later this year has diminished. This is attributed to OPEC+ members continuing to limit the oil supply.
Nevertheless, the agency maintains its estimate that global consumption reached a record high in June and is projected to rise by 2.2 million barrels per day this year, reaching an all-time annual peak of 101.8 million barrels per day. Notably, China, despite facing multiple economic challenges, is anticipated to account for 75% of this growth.
The surge in global consumption is projected to slow considerably in 2024, with an estimated increase of 990,000 barrels per day. This slowdown will align with weaker global economic growth and a diminishing reliance on oil as a primary transportation fuel, according to the IEA’s analysis.
Source: Bloomberg
