OPEC+ output cuts to deepen H2 oil supply deficit, risk higher prices: IEA

OPEC+'s recent announcement of new output cuts this year will deepen an expected supply deficit in the second half of the year and risks higher prices as China's economic rebound continues to drive growth, the International Energy Agency said April 14.

OPEC+ on April 2 announced a surprise "precautionary move" to cut 1.16 million b/d of production this year from May, which has triggered a jump in oil prices to over $85/b from March lows of $70/b.

The voluntary cuts, which come on top of a 500,000 b/d cut in Russian output from March that has been extended through 2023, could reduce output by 1.4 million b/d from March through year-end, the IEA said in its latest monthly oil market report.

With its global oil demand estimate unchanged at a record 101.9 million b/d for 2023, the IEA now estimates that the world could be undersupplied by up to 2 million b/d in the second half of 2023. In its previous oil market report, the H2 supply gap was estimated at 1.65 million b/d.

"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 IEA said. "The latest cuts risk exacerbating those strains, pushing both crude and product prices higher."

North Sea benchmark Dated Brent, assessed by Platts, part of S&P Global Commodity Insights, averaged $78.56/b in March, down $3.93/b on the month. On April 13, it was assessed at $87.87/b.

While OPEC+ may have been motivated to halt the slip in global oil prices due to concerns over inflation and higher interest rates, the IEA said rising global oil stocks at the start of the year may have also contributed to OPEC+'s decision.

In its own oil marker report on April 13, OPEC noted commercial inventories in the OECD had risen by 14.1 million barrels in February to 2.9 billion barrels, some 18 million barrels above the five-year average.

But the IEA noted that, although global oil inventories have held largely steady in February after surging by 58 million barrels in the previous month, stocks in the US, Europe and Japan showed a "hefty" 38.9 million barrel decline in March, their biggest monthly decline in over a year.

Russian supplies

The IEA also said initial fears that the collapse of Silicon Valley Bank, First Republic Bank and Credit Suisse initially prompted banks to tighten their lending and stifle economic growth are not playing out.

"A more sanguine view has since taken hold, as investors began to price an easing of monetary policy that could dampen the impact of an imminent economic downturn," the IEA said.

Overall, the IEA said it still expects world oil demand to increase by 2 million b/d in 2023, to average a record 101.9 million b/d. Growth will gather momentum over the course of the year, with gains of 2.4 million b/d in the second half of the year lifting demand to 103.1 million b/d.

China's economic rebound will make up most of the demand gains in early 2023, and together with other non-OECD countries, will account for almost 90% of the total 2023 demand increase, the IEA said.

On supplies, the IEA said Russian crude production fell by an estimated 290,000 b/d in March to 9.58 million b/d, missing Moscow's 500,000 b/d cut target.

In terms of export flows, the IEA estimates that total Russian oil exports in March rose to the highest since April 2020 thanks to surging product flows. Total oil shipments rose by 600,000 b/d to 8.1 million b/d, with products climbing 450,000 b/d month on month to 3.1 million b/d, according to the IEA.

The IEA also raised its 2023 non-OPEC supply estimate, by 500,000 b/d to 67.1 million b/d, reflecting mostly US output which is projected to grow by 990,000 b/d this year to total 18.8 million b/d.