Saudi Arabia and Russia Extend Oil Output Cuts Until End of 2023, Increasing Concerns of Market Deficit

Oil output cuts extended by Saudi Arabia and Russia until the end of 2023 are expected to lead to a substantial market deficit in the fourth quarter, according to the International Energy Agency (IEA).

This move comes as the IEA largely maintains its estimates for demand growth in 2023 and 2024.

OPEC and its allies, collectively known as OPEC+, initiated supply restrictions in 2022 to stabilize the oil market.

Brent crude, against which the Nigerian oil is priced, surpassed $90 per barrel for the first time this year after OPEC+ leaders, Saudi Arabia and Russia, extended their joint cuts of 1.3 million barrels per day (bpd) until the end of 2023.

Output reductions by OPEC+ members, amounting to over 2.5 million bpd since the beginning of 2023, have thus far been compensated by increased supplies from producers outside the alliance, including the United States, Brazil, and still under-sanctions Iran, according to the IEA’s assessment.

However, the agency warns that starting in September, the reduction in OPEC+ production will result in a significant supply shortfall throughout the fourth quarter as outlined in its monthly oil report.

The IEA also cautions that the absence of production cuts at the beginning of the following year could shift the balance to a surplus. This situation is concerning because it would leave oil stocks at uncomfortably low levels, heightening the risk of another surge in volatility in an already fragile economic environment.

“Chaotic” Forecasting Raises Concerns

Broader economic concerns, exacerbated by China’s sluggish post-pandemic recovery, have been compounded by apprehensions of persistently high interest rates in the United States. Nevertheless, the IEA observes that oil demand in the world’s largest oil-importing nation, China, has so far remained resilient despite its economic downturn.

The IEA emphasizes that China remains a pivotal factor in global oil demand and economic stability, stating, “China is the main wild card. Any abrupt weakening of China’s industrial activity and oil demand is likely to spill over globally, making for a more challenging climate for emerging markets in Asia, Africa, and Latin America.”

Differing Forecasts Highlight Uncertainties

Forecasts for global demand and supply in 2023 and 2024 vary significantly among different organizations. Both the IEA and OPEC, in its monthly report released on Tuesday, expressed optimism regarding Chinese demand in 2023, resulting in limited changes to their global demand estimates for this year and the next.

The IEA forecasts global demand in 2023 to grow by 2.2 million bpd, while OPEC anticipates growth of 2.44 million bpd. However, for 2024, there is a stark contrast. The IEA expects a substantial slowdown in growth to 1 million bpd, while OPEC holds a considerably more optimistic estimate of 2.25 million bpd.

Meanwhile, the U.S. government’s Energy Information Administration (EIA) forecasts demand growth at 1.81 million bpd for 2023 and 1.36 million bpd for the following year.

In this dynamic and uncertain landscape, Tamas Varga of oil broker PVM aptly sums up the situation, saying, “Welcome to the chaotic world of forecasting.”