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The OPEC+ decision to sharply curtail oil production threatens to push prices to levels that tip the global economy into recession, the International Energy Agency warned.
“The massive cut in OPEC+ oil supply increases energy security risks worldwide,” with “resulting higher price levels exacerbating market volatility,” the IEA said in its monthly report. “Oil prices may prove the tipping point for a global economy already on the brink of recession.”
It’s an unusually strong rebuke from the Paris-based agency, which advises most major economies on energy policy. It slashed forecasts for global oil demand growth for next year by 470,000 barrels a day — or roughly 20% — because of “stronger economic headwinds” ranging from inflation to higher interest rates.
Crude futures briefly surged last week when Saudi Arabia and its partners announced a substantial 2 million barrel-a-day output cut, ignoring entreaties from consumers such as the US. Prices have since subsided a little, but remain above $90 a barrel in London.
President Joe Biden fiercely criticized Riyadh’s move, accusing the kingdom of aiding fellow producer Russia as it wages war on Ukraine. He said he would re-evaluate America’s decades-long diplomatic relationship with the Saudis.
The OPEC+ decision “will sharply reduce a much needed build in oil stocks through the rest of this year and into the first half of 2023,” the IEA said. Inventories in developed nations are a “steep” 243 million barrels below their five-year average.
Saudi Arabia and others in the 23-nation alliance have countered that the supply curbs were necessary in the face of extreme economic uncertainty. The International Monetary Fund warned on Tuesday that the worst of the current turmoil “is yet to come.”
Global oil consumption will increase in 2023 by 1.7 million barrels a day, down from a forecast of 2.1 million in last month’s report, the IEA said. This year, demand will expand by 1.9 million barrels a day to average 99.6 million a day.
The Organization of Petroleum Exporting Countries and its partners will likely implement only half of their advertised 2 million-barrel cut, because production in most member countries is already far below their assigned targets, the IEA said.
Still, global supplies may take a further hit in the months ahead as the European Union enacts a ban on Russian oil imports, the agency predicted. The country’s oil exports fell by 230,000 barrels a day to 7.5 million a day in September, according to the IEA’s estimates.
