Oil market faces biggest supply crunch in decades unless OPEC boosts production, IEA says

Russia’s invasion of Ukraine and Western sanctions on its oil exports threaten to trigger a supply shock that will weigh on the global economy and further tighten energy markets unless major producers increase their production, according to the International Energy Agency.

Energy markets were facing the biggest supply crisis in decades, which could lead to lasting changes, the Paris-based agency said in its monthly report on Wednesday.

Russia’s invasion of its neighbor prompted Western countries to impose harsh sanctions on Moscow and the Russian economy. While only some countries, including the United States, have outright banned imports of Russian oil, traders, energy companies and transportation firms are shunning Russian crude, fearing reputational risk, the IEA said. .

The impact could mean that 3 million barrels a day of Russian supply would be effectively cut off from world markets from next month, the IEA said. The agency cut its forecast for global oil supply this year from 2 million barrels per day to 99.5 million barrels per day, based on what major producers in the Organization of the Petroleum Exporting Countries have currently agreed to pump.

The loss of supply drove up energy prices. Although oil prices have fallen sharply over the past week, they are still more than 40% higher than a year ago. On Wednesday, West Texas Intermediate futures, the main US price indicator, traded up 0.6% to $97 a barrel while Brent crude, the international benchmark, fell 0.3% to $99.60.

High oil prices have boosted other fuels, such as natural gas and coal. Meanwhile, non-energy commodities on which the global economy depends and which are produced in Russia, such as some metals and grains, are at some of the highest prices in years.

These higher prices “will increase inflation, reduce the purchasing power of households and are likely to trigger policy reactions from central banks around the world, with a strong negative impact on growth”, the report said. agency.

The outcome will also mean a blow to oil demand, but not enough to balance out lost Russian supply. Oil demand will be a million barrels a day lower this year than the IEA forecast last month at 99.6 million barrels a day. The IEA is also lowering its forecast for oil demand growth this year from 1.1 million barrels per day to 2.1 million barrels per day.

The oil market will fall into deficit as early as the second quarter unless OPEC’s group of oil producers raises supply levels, the IEA said. Beyond spare capacity from major OPEC members Saudi Arabia and the United Arab Emirates, there are no other sources of additional supply that could balance the market. Oil inventories have already been depleted to multi-year lows and the prospect of additional supplies from Iran seems a long way off.

U.S. oil inventories last week were about 13% lower than a year earlier, according to Energy Information Administration data released Wednesday. Domestic production has held steady at around 11.6 million barrels per day since the fall, although drillers have deployed more rigs in recent weeks as prices have risen.

The IEA warning highlights how the situation in Ukraine is increasingly looking like a political headache for OPEC, which since 2016 has struck an uneasy alliance with Russia and a slew of other countries. oil producers, known as OPEC+.

Russia’s attack on Ukraine helped push the price of oil above $100 a barrel for the first time since 2014. Here’s how rising oil prices could further boost inflation in the American economy. Photo illustration: Todd Johnson

The cartel has fended off pressure from major Western oil consumers to step up the pace of its monthly supply increases, which have so far been capped at 400,000 barrels a day. It might feel like taking sides – against Russia.

There were signs, however, that a Western diplomatic effort to urge Gulf oil producers to pump more was working. The United Arab Emirates said last week it would push other OPEC members to pump more oil.

British Prime Minister Boris Johnson traveled to the Gulf on Wednesday to meet with Saudi and Emirati leaders to convince them to increase oil production.

The problem has been compounded by OPEC+’s own inability to meet its supply targets, in part due to struggling oil infrastructure in some member countries. The group’s production is 1.1 million barrels behind its targets, the IEA said.

The IEA has taken its own steps to ease tensions in the oil market. Its members agreed earlier this month to release around 60 million barrels of oil from emergency stocks, but the amount was seen as too small to have a significant impact. The IEA said its members were ready to release more crude from stockpiles.

Write to Will Horner at [email protected]

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