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IEA Warns Of Higher Oil Prices After OPEC+ Announcement

  • OPEC+ has announced that it will extend its production cuts until 2024 while Saudi Arabia will reduce its production by 1 million bpd in July.
  • Fatih Birol, the Executive Director of the IEA, has warned that oil prices are now likely to move higher due to the OPEC+ decision.
  • The IEA was already expecting an imbalance in the oil market in the second half of the year, this move will worsen the supply-demand gap.
oil prices

Oil prices are now a lot more likely to rise after OPEC+ extended the cuts into 2024 and Saudi Arabia announced an additional reduction of 1 million bpd for July, Fatih Birol, the Executive Director of the International Energy Agency (IEA), was quoted as saying on Monday.

Expectations already were that there would be an imbalance in the oil market in the second half of the year; now the supply-demand gap will worsen, CN Wire quoted Birol as saying.

On Sunday, the OPEC+ producers decided to keep the current cuts until the end of 2024, while OPEC’s top producer and the world’s largest crude oil exporter, Saudi Arabia, said it would voluntarily reduce its production by 1 million bpd in July, to around 9 million bpd.

The IEA has been warning this year that supply cuts risk increasing oil and energy prices at a time of heightened uncertainty. 

After the surprise OPEC+ cuts announced in early April, the IEA said in its Oil Market Report for the month that the “surprise OPEC+ supply cuts announced on 2 April risk aggravating an expected oil supply deficit in 2H23 and boosting oil prices at a time of heightened economic uncertainty, even as industrial activity slows in the world’s largest economies and production growth outside the alliance appears robust.”

On Monday, oil prices rose, and analysts reiterated their calls for higher prices by the end of the year, including as high as $100 per barrel.

Goldman Sachs, which sees Brent at $95 per barrel in December, described OPEC+’s meeting as “moderately bullish” to its forecast and offsetting some bearish downside risks such as higher supply from sanctioned Russia, Iran, and Venezuela and weaker-than-thought Chinese demand.  

The Saudi cut “should provide some limited immediate upside for the market, and it should also reinforce Saudi Arabia’s commitment to try to put a floor under the market,” Warren Patterson, Head of Commodities Strategy at ING, said on Monday.

ING left its price forecasts unchanged for now and still expects ICE Brent to average $96 a barrel over the second half of this year.

“The macro outlook continues to be a more important driver for prices than fundamentals at the moment.”

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  • Mamdouh Salameh on June 05 2023 said:
    It will be very stimulating for global investments in oil and gas and for the global economy and OPEC+ members alike if the price of Brent crude jumps above $80 a barrel and continues its surge to $90-$100 in 2023.

    However, it is my professional view that this may not happen as long as there are persistent fears in the market of a global banking or financial crisis triggered by a shaky US banking system.

    Only when these fears disappear altogether from the market will we see prices recover their losses and surge towards $90-$100.

    The decision OPEC+ took yesterday to extend the current production cuts until the end of 2023 is the right and only decision it could take. The reason is that the decline in oil prices over the last three months has nothing to do with the fundamentals of the market which remain robust and everything to do with persistent fears of a banking or financial crisis. In such circumstances cutting production again would have been barrels down the drain with no effect whatsoever on oil prices.

    Meanwhile, the purpose of Saudi Arabia’s voluntary cut is first and foremost to give teeth to Saudi Energy Minister Prince Abdulaziz bin Salman’s threat to speculators to stop manipulating prices rather than to push prices up or balance the market since the market is already balanced.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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