OPEC+ announced the biggest cut to its target production level since 2020 last week – some two million barrels per day (bpd). And the International Energy Agency (IEA) believes that the decision increases energy security risks worldwide and could lead to even higher oil prices.
It could just be the turning point for a global recession.
Thursday, in its Oil Market October report, the IEA described OPEC’s production cut as one of the multiplying “disruptive market forces.”
“The relentless deterioration of the economy and higher prices sparked by an OPEC+ plan to cut supply are slowing world oil demand. The OPEC+ bloc’s plan to sharply curtail oil supplies to the market has derailed the growth trajectory of oil supply through the remainder of this year and next, with the resulting higher price levels exacerbating market volatility and heightening energy security concerns,” IEA wrote.
But OPEC’s actual production cut is set to be around 1 million bpd to 1.1 million bpd. It was only instituted because many global producers have not been able to hit production quotas for months.
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According to the IEA, global demand is expected to contract by 340,000 bpd year-on-year in 4Q 2022. Demand growth has been reduced to 1.9 million bpd in 2022 and to 1.7 million bpd next year, down by 60,000 bpd and 470,000 bpd respectively from its previous report in September. Now, world oil demand is forecast to average 101.3 million bpd in 2023.
In September, the world oil supply had increased by 300,000 bpd to 101.2 million bpd, with OPEC+ providing over 85% of the gains, the IEA pointed out. After a massive 2.1 million bpd boost from 2Q 2022 to 3Q 2022, growth is forecast to decelerate markedly, to 170,000 bpd from 3Q 2022 to 4Q 2022, following OPEC’s cut decision.
And the world can expect further production losses from Russia in December when a European Union (EU) embargo on crude oil imports and a ban on maritime services go into full effect. Even considering lower demand expected, the IEA said OPEC’s production cut will sharply reduce a much-needed build in oil stocks for the remainder of 2022 and into the first half of 2023.
“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession.”
