Oil supply reductions by Saudi Arabia and Russia could trigger a significant supply gap, warns the International Energy Agency.
In a startling revelation, the International Energy Agency (IEA) has raised a red flag about looming disruptions in global oil markets. The cause? A formidable alliance between Russia and Saudi Arabia that’s shaking the very foundations of the oil market.
The IEA warns that oil supply cuts initiated by these two energy giants are setting the stage for a potentially devastating oil supply deficit. This deficit, estimated at a staggering 1.2 million barrels per day during the second half of 2023, could usher in a fresh wave of price volatility. While this figure is lower than previously anticipated due to changes in demand estimates, it still poses a significant threat to consumers and the global economy.
The central concern is that even if Saudi Arabia and Russia decide to ease their production restrictions in early 2024, oil inventories will remain severely depleted. This leaves oil prices vulnerable to sudden and dramatic spikes, as recently witnessed when Brent futures soared above $92 a barrel, reaching a 10-month high.
“The market is really tightening in the second half of the year,” warns Toril Bosoni, head of the IEA’s oil market division. “Already in August, we saw global oil inventories falling by a massive 75 million barrels, according to preliminary data.”
The OPEC+ coalition, which includes Russia and Saudi Arabia, often cites its interventions as necessary to stabilize oil markets. However, the group’s own data, released this week, reveals a yawning supply gap of over 3 million barrels per day in the coming quarter, the largest in a decade. Yet, little explanation has been offered for this strategy.
The IEA’s report marks a stark shift in tone regarding the Saudi-Russian partnership. It explicitly highlights the energy disruptions and inflationary surges resulting from Russia’s war against Ukraine. “The Saudi-Russian alliance is proving a formidable challenge for oil markets,” states the IEA.
This tension between the IEA and oil-producing nations has been brewing for years. The IEA has criticized OPEC+ for squeezing consumers, while Riyadh has dismissed the agency’s projections regarding the transition away from fossil fuels.
What’s also noteworthy is the profound shift in energy dynamics. The IEA’s Executive Director, Fatih Birol, suggests that oil demand could peak within this decade as consumers increasingly turn to renewable energy sources to combat climate change. “We may be witnessing the beginning of the end of the fossil fuel era,” he remarked.
Despite the revisions in global oil demand estimates since 2022, the IEA still anticipates that world consumption will hit a record high in June, with a projected increase of 2.2 million barrels per day this year, primarily driven by China. However, this growth is predicted to slow considerably in 2024 due to a weaker global economic expansion and a reduced reliance on oil as a transport fuel.
As the world grapples with these shifting energy dynamics, the specter of increased oil price volatility looms large, impacting both producers and consumers in an already fragile global economy.