OPEC Data Indicates Oil Cuts Will Cause Widening Supply Shortfall

According to the latest data from the group, oil supply cuts agreed to by OPEC+ nations in the past week are setting global markets on track for a significant supply deficit that will continue to widen as the year continues. 

According to data in a report from the Organization of Petroleum Exporting Countries, markets worldwide may need to be supplied more by around two million barrels each day in the fourth quarter due to cutbacks announced by Saudi Arabia and the nation’s partners. 

Riyadh and its partners shocked crude traders and sent prices rising with the supply reductions announced on April 2. Officials with OPEC said the move was needed to deter speculators from making unnecessary wagers against oils; however, the International Energy Agency, which advises consumer nations, labeled the decision a “bad surprise.”

Oil futures have soared to $87 a barrel in London since the cutbacks were revealed. The move revived global economic growth and inflation fears while shoring up revenues for the 23 OPEC+ member coalition. Some prognosticators believe the tighter outlook could mark the return of $100 oil. 

The Thursday report from OPEC’s research department, which is Vienna-based, provides some justifications for the planned curbs, which could reduce the supply surplus previously projected for this quarter. 

Oil inventories are higher than their five-year average, with current output from the 13 members of OPEC at around 300,000 barrels per day more than necessary from April through June, at 28.8 barrels per day. 

However, global markets are expected to tighten measurably in the second half of the year. OPEC is already expecting a supply deficit to emerge over the summer, with new cuts causing the shortfall to be more pronounced. 

OPEC+ described the cutbacks as a “precautionary measure aimed at supporting the market’s stability.” The group continues to predict a substantial rise in the global oil demand this year. 

Consumption is expected to increase, while supply decreases

According to projections, consumption is expected to increase by 2.3 million barrels per day, passing pre-pandemic levels to reach a record-breaking 101.89 million a day. 

OPEC’s output reductions are expected to be smaller than advertised, as a few members are already pumping below their target levels. However, even if only the Gulf state’s core group were to implement the deal, OPEC output could drop by around 28 million barrels per day — which is roughly 1.6 million per day less than the organization believes will be needed in the third quarter, and at minimum 2 million less than is required in the fourth. 

The demand for OPEC crude is projected to reach 30.3 million barrels daily in the last three months of 2023. 

OPEC’s calculations also consider that Russian supplies will slump by an average of 750,000 barrels a day this year and plunge sharply this quarter. The drop is substantially more significant than the 500,000-barrel-a-day reduction pledged by the Kremlin. 

Exports from Russia have proved resilient despite promises to tamp down production against international censure over the invasion. However, the slow-down in the most recent shipping data suggests sanctions may be beginning to hurt. 

The OPEC+ alliance is scheduled to review the output policy for the year’s second half in June.