The International Energy Agency (IEA) has issued a stark warning about the potential for a significant increase in oil price volatility due to oil supply cuts by major producers Saudi Arabia and Russia. These cuts, which are part of the OPEC+ agreement, have resulted, according to the IEA, in a “significant supply deficit” that could have far-reaching consequences for global oil markets and consumers.
The IEA forecasts that global oil markets will experience a daily deficit of 1.2 million barrels in the second half of 2023, following the recent decision by OPEC+ leaders to extend production cuts until the end of the year. While this projected shortfall is smaller than previously estimated, it still poses a significant risk to oil markets.
Even if Saudi Arabia and Russia ease production cuts in early 2024, the IEA warns that oil inventories will be severely depleted, leaving prices susceptible to sudden and unpredictable shocks. Indeed, Brent crude futures recently hit a 10-month high above $92 a barrel, underscoring the market’s vulnerability.
“The market will really tighten in the second half of the year,” says Toril Bosoni, head of the IEA’s oil market division, emphasizing the growing pressure on global oil supplies. Preliminary data for August already shows a significant decline in global oil inventories, and the trend is worrying.
While OPEC+ members claim their intervention is aimed at stabilizing markets, their own data suggests a much larger supply shortfall of more than 3 million barrels per day in the coming quarter. This divergence in supply and demand forecasts is puzzling to many observers, as the OPEC+ coalition has not provided clarity on its current strategy.
The IEA report explicitly criticizes the Saudi-Russian partnership, highlighting energy supply disruptions and inflationary pressures caused by Russia’s war in Ukraine. Describing the alliance as a “formidable challenge for oil markets,” the IEA emphasizes that extending Saudi and Russian production cuts until the end of the year will lead to a significant market deficit in the fourth quarter.
Tensions between the IEA and the producer group have escalated in recent years. The IEA has criticized OPEC+ for its impact on consumers, while Riyadh has rejected the agency’s projections of a transition away from fossil fuels.
IEA executive director Fatih Birol has also suggested that oil demand could peak this decade as consumers increasingly shift to renewable energy to combat climate change. This shift could mark the beginning of the end of the fossil fuel era, which would be a significant transformation for the global energy landscape.
Although the IEA is lowering its estimate of global oil demand by 400,000 barrels per day annually from 2022, it still expects record consumption. Global consumption hit a new high in June, and the agency forecasts that it will increase by 2.2 million barrels per day in 2023, reaching an unprecedented 101.8 million barrels per day. China is expected to make a significant contribution to this growth, accounting for 75% of the total increase.
However, in 2024, the IEA forecasts a noticeable slowdown in the growth of global oil consumption, which will amount to 990 thousand barrels per day. This slowdown is explained by weakening global economic growth and a decreasing dependence on oil as a transportation fuel.
The IEA warning serves as a reminder of the complexity and uncertainty of the situation in global oil markets, as well as its potential impact on economies and consumers around the world.