IEA warns global oil supply could struggle to match demand in 2023 on Russia, OPEC constraints

Global oil supply may struggle to keep up with demand in 2023 as a resurgent China comes when Russia begins to feel the full force of sanctions, the International Energy Agency warned in its latest monthly oil market report June 15.

Despite triple digit oil prices for much of 2022, a Dated Brent benchmark that has remained well above $120/b in recent days and evidence high prices are now hurting demand, the IEA sees oil demand growth of 2.2 million b/d next year compared with 1.8 million b/d growth this year.

The report's first look at 2023 also revealed the IEA sees oil demand returning to pre-pandemic levels next year at 101.6 million b/d as non-OECD growth accounting for almost 80% of the gains, offsets a slowdown in the OECD.

While the IEA said there are signs the oil market may rebalance in the second half of this year, thanks to OPEC+ increasing supply and the release of strategic reserves along with tempered oil demand growth, the Paris-based agency added "this situation might prove short-lived".

The IEA pointed to potential lost Russian barrels given that EU countries have agreed to ban 90% of the bloc's imports of Russian crude and oil products, to be phased out over the next six to eight months, along with the recovery of China from COVID-19 lockdowns and risks around OPEC+ production buffers.

The IEA recognized the trade off as higher OPEC+ flows come at the expense of the group's effective spare capacity, with the remainder held mostly by Saudi Arabia and the UAE, and warned of the increasing risk of oil market volatility.

"OPEC+ capacity constraints set the stage for 2023, when global oil supply will struggle to keep pace with demand... While non-OPEC+ continues to power ahead, OPEC+ would have to further deflate its shrunken capacity cushion to keep the implied balance from tipping into deficit," the IEA said.

"In that case, spare capacity would shrink to just 1.5 million b/d, the lowest level in recent history," the report added.

Supply silver linings

A lot rests on the shoulders of US production, which has been in the doldrums since COVID-19 struck, with the IEA seeing US supply accounting for the majority of gains in 2023.

The IEA forecasts non-OPEC+ supply rising by 1.8 million b/d next year compared to 1.9 million b/d in 2022, with high oil prices "clearly coaxing more oil from the shale patch and breathing life into conventional oil projects the world over."

The IEA also added that Brazil and Canada are poised to reach their highest ever levels for two years running, while noting that the Russian outlook could continue to surprise after production surprising rose in May.

"After plunging 930,000 b/d in April, total oil production in May actually rose by 130,000 b/d to 10.55 million b/d as crude oil exports to world markets were reallocated from traditional buyers adhering to new sanctions or shunning barrels voluntarily in solidarity with Ukraine," it said.