International Energy Agency (IEA) is warning of higher oil prices in the second half of the year, but …
While conflicting projections are keeping crude markets on edge, prices continue to creep up.
The International Energy Agency (IEA) is warning of higher oil prices in the second half of the year, with global oil demand this year on track to rise to a record 101.9 million barrels per day (bpd). This is two million bpd higher than last year.
“Oil market balances were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge,” the IEA said in its monthly oil report released last week. “The latest (OPEC) cuts risk exacerbating those strains, pushing both crude and product prices higher.” The IEA expects global oil supply to fall by 400,000 bpd by the end of the year, citing an expected production increase of one million bpd from outside of OPEC+ beginning in March versus a 1.4 million bpd cut in OPEC+ output.
But not everybody agrees.
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In its closely watched Monthly Oil Market Report (MOMR), the Organization of the Petroleum Exporting Countries (OPEC) pointed to downside risks in summer demand, citing a weaker growth backdrop, tighter monetary policy, higher OECD stocks, and instability in the global financial sector.
In the report released last Thursday, OPEC flagged downside risks to summer oil demand as part of the backdrop to output cuts announced earlier this month. The Organization of Economic Co-operation and Development (OECD) “commercial inventories have been building in recent months, and product balances are less tight than seen at the same time a year ago,” OPEC wrote in the report. OECD industry stocks in January hit their highest level since July 2021, at 2.83 billion barrels.
“It should be noted that potential challenges to global economic development include high inflation, monetary tightening, stability of financial markets and high sovereign, corporate and private debt levels,” Reuters quoted OPEC as saying. Much depended on the reopening of China post-COVID, yet that would still not stop a decline in global refining intake of crude, the report pointed out.
However, OPEC maintained its forecast that oil demand would rise by 2.32 million bpd, or 2.3 per cent, in 2023 while also nudging up its forecast for China.
Interestingly, the U.S. Energy Information Administration (EIA) also sees the oil market tipping into a surplus in the second half of the year, with non-OPEC producers, primarily the U.S., continuing to increase their output.
In its latest Short-Term Energy Outlook (STEO), the EIA projected the overall global oil production to grow by 1.5 million bpd in 2023 due to solid growth from non-OPEC countries, excluding Russia. Non-OPEC+ production growth will primarily be driven by North and South America, the administration said.
This year, global oil production is set to average 101.3 million bpd, while global oil consumption is estimated at 100.87 million bpd. The surplus on the market will start to shrink this quarter, but even in Q3, the market will be in a slight surplus.
If the current OPEC+ cuts expire at the end of 2023, global oil production is set to average 103.25 million bpd in 2024, while consumption is expected to be 102.72 million bpd – with supply outstripping demand next year, too, according to EIA projections. This could be the reason for Washington’s comparatively meeker response to the OPEC output cut announcement.
“Increasing risks in the U.S. and global banking sectors increases uncertainty about macroeconomic conditions and their potential effects on liquid fuels consumption, which increases the possibility of liquid fuels consumption being lower than our current forecast,” the EIA report added, emphasizing, “we expect global oil markets will be in relative balance over the coming year.”
Despite the recent upward trend in market prices, commodity analysts from Morgan Stanley and Citi believe that the OPEC+ move to cut output from next month signals concern in their ranks about demand – per Morgan Stanley – and that the rebound in Chinese demand is far from a certainty, per Citi.
According to Morgan Stanley’s Martijn Rats, the output cut “reveals something; it gives a signal of where we are in the oil market. And look, let’s be honest about this, when demand is roaring … then OPEC doesn’t need to cut,” he was quoted as saying.
Meanwhile, Citi’s Edward Morse said, “We’re waiting to see what’s really happening with the [Chinese] economy, but it is a slower recovery. If anything, that will be an end-of-year phenomenon.”
All these projections are contrary to a belief that OPEC+ cuts will tighten the market so much later this year that prices could jump to $100 per barrel.
In conclusion, the global economy is not out of the woods yet, and, despite some robust projections from IEA, the crude future continues to face uncertainties.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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