The International Energy Agency (IEA) has issued a warning that oil supply cuts by Saudi Arabia and Russia are set to create a “significant supply shortfall,” threatening a surge in price volatility. The IEA predicts a daily deficit of 1.2 million barrels of oil in the second half of 2023, following recent announcements by OPEC+ leaders to extend production cutbacks until year-end. This shortfall, although smaller than previously estimated, still poses risks to consumers and global markets.
The tightening oil market is evident as global oil inventories reportedly fell by a substantial 75 million barrels in August. Even if Saudi Arabia and Russia were to relax their production curbs in early 2024, oil inventories are expected to be critically low, leaving prices susceptible to shocks. Recently, Brent futures reached a 10-month high above $92 a barrel.
OPEC+ nations have claimed that their production cuts are intended to balance markets, but their own data points to a supply hole of over 3 million barrels a day in the upcoming quarter, the largest in a decade. This strategy has been met with little explanation from the coalition.
The IEA’s report is a more explicit criticism of the Saudi-Russian partnership than in the past, with a focus on the energy disruption and inflationary impact of Russia’s war in Ukraine. The report states that the “Saudi-Russian alliance is proving a formidable challenge for oil markets,” and the extension of output cuts by these two major producers will result in a substantial market deficit through the fourth quarter.
This warning comes amid growing tensions between the IEA and the producers’ group. The IEA has criticized OPEC+ for squeezing consumers, while Riyadh has disregarded the agency’s projections regarding the transition away from fossil fuels.
IEA Executive Director Fatih Birol has suggested that oil demand could reach its maximum level this decade as consumers shift toward renewable energy to combat climate change, potentially marking the “beginning of the end of the fossil fuel era.”
Although the IEA has reduced its estimates of global oil demand for each year since 2022 by 400,000 barrels per day, it still predicts that world consumption reached a record high in June and will increase by 2.2 million barrels per day in 2023, reaching an all-time annual high of 101.8 million barrels per day. China is expected to account for 75% of this growth.
However, world consumption is projected to slow significantly in 2024, with an increase of only 990,000 barrels per day. This deceleration is anticipated due to weaker global economic expansion and a decreasing reliance on oil as a transport fuel, indicating a shifting landscape in the energy sector.
