Disruptive market forces are intensifying as the world struggles to cope with the worst global energy crisis ever. The OPEC+ bloc’s plan to severely curtail oil supplies to the market has ended the oil supply growth trajectory through the rest of this year and next, with higher price levels contributing to market volatility and increasing concerns about energy security. Benchmark crude oil prices have risen by around $14/bbl from their lows in September and Brent has rebounded to triple digits. With inflationary pressures relentless and interest rate hikes escalating, higher oil prices could be a tipping point for a global economy already teetering on the brink of recession.
Due to the stronger economic ones, our forecast for global oil demand growth for 2023 is lower by 470 kb/d from last month’s Report, to 1.7 mb/d. Our revisions are underpinned by further downgrades of global GDP growth expectations from major institutions, and a recession is now expected in some European countries as risks mount for emerging and developing economies. For this year, growth in global oil demand has been further reduced, to 1.9 mb/d from 3.2 mb/d expected before Russia’s invasion of Ukraine. The still relatively strong headline figure includes a sharp slowdown underway, with demand now forecast to fall by 340 kb/d yoy in 4Q22, despite increased gas-to-oil switching in power generation and industry.
The reduction in OPEC+ supply will be less than the 2 mb/d reduction in production targets announced, and most members of the Alliance are already producing well below their ceilings due to capacity constraints. Our current estimate is for a reduction of around 1 mb/d in OPEC+ crude output since November, with Saudi Arabia and the UAE delivering the bulk of the cuts. Further production losses could come from Russia in December, when an EU embargo on crude oil imports and a ban on maritime services comes into full effect. Russian officials have threatened to cut oil production to offset the negative impact of proposed price caps.
While big spikes in oil prices have previously prompted a strong investment response that led to more supply from non-OPEC producers, this time may be different. US shale producers, traditionally the most responsive to changing market conditions, are struggling with supply chain constraints and cost inflation – and, so far, have maintained capital control. This casts doubt on suggestions that higher prices would have to balance the market through additional supply.
The massive drop in OPEC+ oil supply increases energy security risks around the world. Even taking into account lower demand expectations, it will significantly reduce the amount of oil stocks needed in the rest of this year and into the first half of 2023. At the end of August, OECD industry inventories remained 243 mb below the five OECD industrial inventories. annual average, at 2 736 mb. They would have been much lower had it not been for the release of 185 mb of IEA member state government stocks from March to August. It is clear from the new wave that has come out of the market that energy security is as important today as it was 48 years ago when the IEA was founded. Now, as then, commercial and residential consumers are taking steps to reduce their energy bills and that effort could have a lasting impact on oil markets.