IEA Warns OPEC+ Supply Cuts Could Drive Oil Prices Higher
The International Energy Agency (IEA) has warned that OPEC+ supply cuts are poised to erode oil inventories, potentially driving prices to new highs in the short term.
These tighter supplies, coupled with robust global demand, have been instrumental in propelling oil prices to recent peaks, with Brent crude reaching over USD 88 a barrel, marking its highest level since January. However, concerns are emerging about the sustainability of this rally in the face of looming economic headwinds.
Supply Cuts and Market Impact
The collaboration between the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, has led to significant oil output reductions, aimed at bolstering the market's stability. The IEA's latest monthly oil market report indicated that adherence to current OPEC+ targets could result in a drawdown of oil inventories by 2.2 million barrels per day (bpd) in the third quarter, followed by a reduction of 1.2 million bpd in the fourth quarter. This development raises the possibility of further price escalation, according to the IEA.
Notably, the IEA attributed the recent decline in global oil supply of 910,000 bpd in July to a substantial reduction in Saudi Arabian output. Despite this reduction, Russian oil exports remained steady at around 7.3 million bpd during the same month.
Demand Dynamics and Future Projections
Looking ahead, the IEA forecasts a significant slowdown in demand growth in 2024, projecting an increase of 1 million bpd. This downward revision is attributed to a combination of lackluster macroeconomic conditions, a tapering post-pandemic recovery, and the growing prevalence of electric vehicles. The IEA's analysis suggests that as the initial rebound from the pandemic diminishes and various challenges confront Organisation for Economic Co-operation and Development (OECD) nations, oil consumption gains are expected to decelerate markedly.
While the IEA remains cautious in its projection, OPEC offers a more optimistic outlook, maintaining its forecast that oil demand will rise by a robust 2.25 million bpd in 2024. This disparity reflects the uncertainty surrounding global economic conditions and their potential impact on oil consumption patterns.
China's Dominance and Concerns
The IEA's data underscores China's prominent role in driving global oil demand. Despite concerns about the economic health of the world's largest oil importer, China is predicted to contribute to over 70 per cent of demand growth this year. However, with the ongoing challenges in the broader economic landscape, questions linger about the sustainability of China's demand surge.
(Inputs from Reuters)
