OPEC Flags Downside Risks to Summer Oil Demand, Shedding Light on Output Cuts

The Organization of the Petroleum Exporting Countries (OPEC) has recently flagged downside risks to summer oil demand as a backdrop to output cuts announced this month by OPEC+ producers.

The group highlighted some of the factors behind the surprise move that led to a rise in oil prices.

OPEC+ comprises OPEC, Russia, and other oil-producing countries, and on April 2, some of its members announced new voluntary production cuts. The unexpected move has prompted oil to rally towards $87 a barrel from below $80.

OPEC+ gave little information on the reasons for the surprise cuts, saying in a statement that they were a “precautionary measure” to support market stability. However, OPEC delegates revealed that they did not know the exact reasons for the reduction.

In a discussion on the summer market outlook in its monthly oil report on Thursday, OPEC said that oil inventories looked more ample and global growth faced a number of challenges.

OPEC referred to the Organisation for Economic Co-operation and Development (OECD) commercial inventories that have been building in recent months, and product balances that are less tight than seen at the same time last year.

OPEC also pointed out that the usual U.S. seasonal demand uptick could take a hit from any economic weakness due to interest rate hikes. Moreover, the reopening of China after strict COVID-19 containment measures were scrapped had yet to stop a decline in global refining intake of crude.

OPEC added that potential challenges to global economic development include high inflation, monetary tightening, stability of financial markets, and high sovereign, corporate, and private debt levels.

Despite the downside risks, OPEC maintained its forecast that oil demand would rise by 2.32 million barrels per day (bpd), or 2.3%, in 2023, and nudged up its forecast for China.

The global figure remained unchanged for a second straight month. OPEC left its 2023 economic growth forecast at 2.6% and cited potential downside risks. However, it said the spillover from U.S. bank failures in March had a limited economic impact.

Oil weakened after the report was released with Brent crude falling below $87 a barrel. The report also showed that OPEC’s oil production fell in March, reflecting the impact of earlier output cuts pledged by OPEC+ to support the market as well as some unplanned outages.

For November last year, with prices weakening, OPEC+ agreed to a 2 million bpd reduction in its output target, the largest since the early days of the pandemic in 2020.

The April 2 voluntary cuts bring the total curbs pledged by OPEC+ to 3.66 million bpd, equal to 3.7% of global demand.

The report kept its estimate of the amount of crude OPEC needs to pump in 2023 to balance the market steady at 29.3 million bpd, suggesting there will be a deficit if OPEC keeps pumping at March’s rate or makes further cuts.