Saudi Arabia’s decision to extend cuts to its crude-oil output until the end of the year is likely to lead to a significant supply shortfall for the rest of the year, keeping prices higher at the pump, according to the International Energy Agency.
In its monthly report, the IEA said cuts from the Organization of the Petroleum Exporting Countries, a cartel of oil-producing nations where Saudi Arabia is the largest producer and de facto leader, have led to 2.5 million barrels a day being removed from the market since January, though this has mostly been mitigated by record supply coming from the U.S. and Brazil, with non-OPEC supply up by 1.9 million barrels a day.
However, with Saudi production as well as Russian exports being reduced until the end of the year, the market is now likely to see a significant shortfall of about 1.1 million barrels a day in the fourth quarter, which is likely to support prices, the IEA said Wednesday. The unwinding of the cuts in 2024 should bring the market back to surplus, but a lack of oil inventories could mean high volatility in the market, the Paris-based agency added.
“The Saudi-Russian alliance is proving a formidable challenge for oil markets,” the IEA said, noting that their combined supply cuts of about 1.3 million barrels a day had led to a sharp increase in prices, with Brent Crude, the international benchmark for crude oil, rising above $90 a barrel and prices pushing to a 10-month high.
The cuts come on top of the fact that the IEA is expecting demand to grow further. Oil demand is set to rise by 2.2 million barrels a day in 2023, averaging 101.8 million barrels a day, according to the IEA. Demand growth is likely to temper next year to 1 million barrels a day, averaging 102.8 million barrels a day, the IEA said, as China’s economic recovery from the Covid-19 pandemic tempers and higher electric-vehicle adoption lowers consumer demand for fossil fuels. Nevertheless, China is expected to account for 75% of the increase in demand this year.
Read more here.