Oil prices dropped on Thursday as OPEC adjusted its demand forecast, but the IEA’s warning of a significant supply deficit later this year helped to bolster prices on Friday morning, OilPrice said.

The optimism that nudged Brent above $87 per barrel, mostly stemming from US CPI figures coming in at 5.6%, looked set to wane when OPEC lowered its demand forecast for the second half of 2023. At the same time, OPEC also retrospectively increased demand in Q1, leaving it with the same annual growth as previously (2.3 million b/d). The IEA’s report, however, boosted oil prices on Friday as the agency warned of the potential for a significant supply deficit later this year.

The head of the International Energy Agency Fatih Birol said that oil markets could see tightness in the second half of 2023 should voluntary production cuts of key OPEC+ producers stay in place until the end of 2023, pushing prices even higher than currently. In its Oil Market Report, the agency then warned a supply deficit caused exacerbated by OPEC+ cuts could derail global economic growth. 

The global oil market could see tightness in the second half of 2023, which would push oil prices higher, Fatih Birol, executive director of the International Energy Agency, said on Wednesday. Oil prices have surged above $80 since the beginning of the month, after the Organization of the Petroleum Exporting Countries and allies including Russia, collectively known as OPEC+, surprised markets with an announcement of voluntary production cuts of 1.66 million barrels per day (bpd) from May until the end of 2023. International benchmark Brent futures traded at about $87 a barrel on Wednesday, and U.S. crude futures traded at about $83 a barrel, Reuters reports.

Europe was particularly susceptible to declines in Russian supply, but a milder winter helped avoid a worst-case scenario this year, Birol said. However, next winter is expected to be challenging for the region in terms of energy supplies, Birol said at the Columbia Global Energy Summit in New York. Birol added that Europe should be able to do without Russian liquefied natural gas. Russia announced in February plans to cut oil output by 500,000 barrels per day (bpd) from an output level of 10.2 million bpd. Birol on Wednesday added that global fossil fuel consumption could peak before the late-2020’s.

IEA says OPEC+ cuts could derail economic growth. In its Oil Market Report, the IEA said that the latest OPEC+ cuts could exacerbate the oil supply deficit and push oil prices higher. The rise in oil prices will add pressure on consumers, especially in emerging and developing economies, hurting the global economic recovery. The IEA also noted that growth in the U.S. shale patch is limited by supply chain bottlenecks and higher costs. The surprise OPEC+ cuts could push the oil market into an even higher supply deficit later this year and weigh on consumers and global economic recovery and growth, the International Energy Agency (IEA) said on Friday.

“Our 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 agency said in its Oil Market Report for April today. “The latest cuts risk exacerbating those strains, pushing both crude and product prices higher. Consumers currently under siege from inflation will suffer even more from higher prices, especially in emerging and developing economies,” the agency noted. Some of the biggest OPEC+ producers announced early this month they would remove another 1.16 million bpd from the market between May and December 2023, on top of Russia’s 500,000-bpd cut which was extended until the end of the year. The IEA believes the recent build in commercial inventories could have played a part in the OPEC+ decision to further restrict supply.

OPEC itself said on its own report on Thursday that commercial OECD oil stockpiles had been rising in recent months, pointing to a less tight market than at this time last year. The IEA said in its report on Friday, commenting on the OPEC+ announcement, “While apparently a move to support declining prices amid financial turmoil in mid-March, rising global oil stocks may have also contributed to the decision.”

The trend of rising stocks was already reversing by March, with OECD industry stocks plunging by 39 million barrels, their biggest monthly decline in over a year, according to IEA’s estimates. China’s resurging demand, especially in the latter half of 2023, is set to drive global oil demand up by 2 million bpd in 2023 to a record 101.9 million bpd, the agency said, leaving its estimates unchanged from last month’s report. But the OPEC+ cuts risk creating a significant supply deficit, the IEA said today, noting that meeting demand growth could be challenging, “as the new OPEC+ cuts could reduce output by 1.4 mb/d from March through year-end, more than offsetting a 1 mb/d increase in non-OPEC+ production.”

“Growth from the US shale patch, traditionally the most price-responsive source of more output, is currently limited by supply chain bottlenecks and higher costs,” the agency noted.

Speculators get bullish again.Net long positions in ICE Brent jumped by more than 73,000 contracts (the equivalent of 73 million barrels) in the week to April 4, i.e. the one following the announcement of OPEC+ voluntary cuts, marking the biggest weekly gain for market bulls since late 2016.

BP launches new platform in Gulf of Mexico.The UK-based energy majorBP announced it had started oil production at Argos, its first new platform in the US Gulf of Mexico since 2008 with a capacity of 140,000 boepd, seeking to ramp up production to 400,000 b/d by the mid-2020s.

/OilPrice, Reuters, IEA/