The International Energy Agency (IEA) has stated that the extension of oil output cuts by Saudi Arabia and Russia until the end of 2023 will result in a significant market deficit during the fourth quarter.
This announcement comes as the IEA largely maintains its estimates for oil demand growth for this year and the next, according to Reuters.
OPEC and its allies, collectively known as OPEC+, began restricting oil supplies in 2022 to stabilize the market. Recently, benchmark Brent crude exceeded $90 per barrel for the first time this year after Saudi Arabia and Russia, leaders of OPEC+, prolonged their joint production cuts of 1.3 million barrels per day (bpd) until the end of 2023.
While OPEC+ members have cut output by over 2.5 million bpd since the start of 2023, this has been offset by increased production from non-alliance producers such as the United States, Brazil, and Iran, which is still under sanctions, according to the IEA.
However, starting in September, the reduction in OPEC+ production will lead to a substantial supply shortfall in the fourth quarter, the IEA reported in its monthly oil report. Nevertheless, the absence of cuts at the beginning of the following year could create a surplus, with stock levels uncomfortably low, raising the risk of increased market volatility in an already fragile economic environment.
Economic concerns, particularly China’s slow post-pandemic recovery and expectations of continued high interest rates in the United States, have contributed to global economic unease. However, the IEA noted that China, the world’s largest oil importer, has so far maintained oil demand despite its economic downturn. It also emphasized that any sudden weakening of China’s industrial activity and oil demand could have global repercussions, particularly affecting emerging markets in Asia, Africa, and Latin America.
Forecasts for global oil demand and supply vary significantly among different agencies. Both the IEA and OPEC, in their respective monthly reports, express optimism about Chinese demand for 2023, leading them to keep their global demand estimates for this year and the next largely unchanged. The IEA forecasts a 2.2 million bpd growth in global demand for 2023, while OPEC anticipates growth of 2.44 million bpd.
However, their predictions diverge significantly for 2024. The IEA expects a sharp slowdown in growth to 1 million bpd, while OPEC has a more optimistic estimate of 2.25 million bpd.
In contrast, the U.S. government’s Energy Information Administration has forecast demand growth of 1.81 million bpd for 2023 and 1.36 million bpd for the following year, underscoring the complexity of oil market forecasting.