By Will Horner
The oil market will fall into a much larger oil deficit far sooner than expected, following surprise production cuts from some of OPEC’s leading members, the International Energy Agency said Friday.
The gaping hole in the global oil market between the availability of crude and rebounding demand for it will reach 2 million barrels a day by the third quarter of the year, the Paris-based agency said in a closely followed monthly report.
The gap, which oil producers outside of the Organization of the Petroleum Exporting Countries, or OPEC, will be unable or unwilling to fill, risks sending crude prices sharply higher, worsening inflation just as it appears to be moderating, and deepening an economic malaise, the agency said.
The decision, taken by Saudi Arabia and a selection of some of OPEC’s largest oil producers, to cut oil output by nearly 1.2 million barrels a day was announced earlier this month and took the oil market by surprise. It came just as a consensus among industry analysts predicted that the oil market would need to pump more oil, rather than less, in order to satisfy rebounding demand in China and prevent prices from jumping.
Russia, which is allied with OPEC in an alliance known as OPEC+, also said it would extend a round of announced oil cuts until the end of the year. The cuts will total roughly 1.6 million barrels a day, though many analysts expect the actual reduction to be slightly lower in practice.
The IEA on Friday said that it expects the cuts to lead to 1.4 million barrels a day less of oil between March and the end of the year. The planned cuts are expected to begin next month and last until the end of the year.
Oil-producing nations not part of OPEC are set to increase their output during the same period, which should soften the impact. That includes a group of smaller oil producers such as Guyana and Nigeria, who are proving to be a wild card for the market.
Increased output from non-OPEC+ oil producers would likely add 1 million barrels a day between March and the end of the year, but the increase wouldn’t be enough to offset the Saudi-led move, the IEA said.
U.S. shale oil producers, who in past years were quick to ramp up supply when the price was right, are unlikely to do so again. Western nations are increasingly reluctant to invest more in fossil fuel supply, favoring instead renewable sources of energy that don’t contribute to the negative effects of climate change.
“Oil market balances were already set to tilt into a substantial deficit in the second half of this year, but the new cuts risk further tightening balances and pushing up oil prices at a time when inflationary pressures are already hurting vulnerable consumers,” the IEA said in the report.
“Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly. This augurs badly for the economic recovery and growth,” it added.
While last month, the IEA expected the oil market to fall into a deficit in the third quarter of the year, it now expects a 400,000-barrel gap between supply and demand to appear in the second quarter.
That gap will grow to 2 million barrels a day in the third and fourth quarters. For 2023, the IEA forecasts an average deficit of 800,000 barrels a day, twice what it was expecting before the Saudi-led oil cuts.
The IEA, along with many oil market forecasters and OPEC itself, expects China’s reopening following its coronavirus lockdowns to rapidly increase demand for oil. The IEA said demand for oil would grow by 2 million barrels a day this year, in line with earlier forecasts. Nearly 90% of that increase would be outside of developed nations in the West, while China alone would contribute to around half of the increase, it said.
Write to Will Horner at william.horner@wsj.com