Saudi Oil Cuts to Lead to Significant Supply Shortfall in 2023, IEA Says
Summary
Saudi Arabia’s decision to extend cuts to crude oil output until the end of the year is likely to lead to a significant supply shortfall, keeping prices higher, IEA said.Saudi Arabia’s decision to extend cuts to 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 that cuts from Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries 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 1.9 million barrels a day.
However, with Saudi production and also Russian exports being cut 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, something 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 the cuts to supply from both nations of about 1.3 million barrels a day led to a spike 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 expected further demand growth, with oil demand set to rise by 2.2 million barrels a day in 2023, averaging 101.8 million barrels a day, according to the IEA. This demand growth is likely to temper next year to 1 million barrels a day, averaging 102.8 million barrels a day, the IEA said.
The drop in demand next year is due to China’s economic recovery from the Covid-19 pandemic tempering, as well as higher electric vehicle adoption cutting demand from consumers for fossil fuels. However, China is expected to account for 75% of the increase in demand this year.
The Paris-based agency added that global oil inventories fell by 76.3 million barrels a day, hitting a 13-month low in August. It said that next year, “oil stocks will be at uncomfortably low levels, increasing the risk of another surge in volatility that would be in the interest of neither producers nor consumers, given the fragile economic environment."
Meanwhile, the IEA expects oil supply this year to grow by 1.5 million barrels a day in 2023 to average 101.6 million barrels a day. The IEA expects this to rise further next year, by 1.7 million barrels a day to average, an increase of roughly 200,000 barrels a day compared to last month’s forecast, and an average of 103.3 million barrels a day.
The IEA also said that with the price of crude oil rising amid supply cuts, pricing for Urals—the benchmark price for Russian oil—has also jumped to over $75 a barrel, pushing Indian consumers to find alternative sources. India had been one of the main buyers of Russian oil since the start of the war in Ukraine, but in August, Russian exports to India fell by 300,000 barrels a day to 1.8 million barrels a day compared to April and May.
It also said that the price of Urals averaged $70 a barrel through August, $10 above the price cap set by the Group of Seven last year in an effort to stymie Russian oil revenues amid its invasion of Ukraine. “This may have led some buyers, shippers and insurers to reconsider activity in the Urals market, but with only a marginal impact on shipments so far," the IEA said, adding that rising crude prices pushed Baltic Urals prices to $75 a barrel in early September.
Write to Yusuf Khan at yusuf.khan@wsj.com
