The decision by Opec+ to cut oil output from next month risks tipping the global economy into recession and higher crude prices will increase energy security risks worldwide, the International Energy Agency has warned.
Last week’s move by the oil cartel, led by Saudi Arabia, and its allies, including Russia, to cut their production target by 2mn barrels a day has reverberated around the world. The US has accused Saudi Arabia of aligning with Russia to drive up oil prices at a time when much of the world is struggling to manage rising inflation.
The Paris-based IEA, which advises OECD countries on energy policy, said the planned cuts had already dented global oil demand.
“The Opec+ bloc’s plan to sharply curtail oil supplies to the market has derailed the growth trajectory of oil supply through the remainder of this year and next, with the resulting higher price levels exacerbating market volatility and heightening energy security concerns,” the agency said on Thursday in its monthly oil report.
“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” it added.
The warning came after the IMF this week lowered its world economic growth outlook for 2023 to 2.7 per cent, its lowest year ahead growth forecast since 2001, and predicted that next year could feel like a recession in much of the world.
Oil demand in the final three months of the year is now expected to fall by 340,000 b/d compared with last year, the IEA said. The agency cut its forecast demand growth for 2023 by 470,000 b/d to 1.7mn b/d.
But even with lower global demand, the “massive cut” in Opec+ oil supply would “sharply reduce” the world’s ability to replenish stocks through the rest of the year and the first half of 2023, it added. At the end of August, OECD oil reserves were 243mn barrels lower than their five-year average at 2.7bn barrels, it said.
Saudi Arabia has defended the cuts, arguing they are needed to avoid a collapse in oil prices that would damage long-term supply. The Opec+ decisions were based “purely on economic considerations” and not “politically motivated” to hurt the US, the Gulf kingdom’s foreign ministry said on Thursday.
Given that many Opec+ members are already failing to meet their targeted production levels, the actual drop in physical oil supply due to the cuts is expected to be about 1mn b/d from November, the IEA said.
However, Opec+ supply could fall further following the full implementation of the EU’s embargo on Russian crude, imposed over the war in Ukraine, from December 5, it added.
Next year the IEA expects Russian oil production to average 9.5mn b/d, down from 10.9mn b/d in 2022, with close to 2mn b/d of production disrupted due to the widening impact of sanctions.
“We expect Russian oil output to ease gradually from next month and assume the decrease will deepen in December when the EU embargo on Russian crude oil takes effect,” it said.
The agency warned that Russian output could full further if, as Russian officials have threatened, Moscow cuts its own production to offset any negative impact from a proposed price cap on Russian oil exports.