The July oil report from the International Energy Agency (IEA) perfectly captures a market where there are strong arguments on both sides of the divide over whether oil prices are poised to rise significantly or stay mired where they have been after a slide in prices that stretches back almost a year.

Oil as measured by the global crude benchmark Brent price topped out at about $105 per barrel at the close of August. The trend has been downward since then, with some surges in price along the way, none of which had staying power.

The end result of those moves is that Brent recently dropped to a low of $73 a barrel but has since moved back above $80 a barrel.

The closely watched IEA report doesn’t project prices. But the analysis released Thursday by the organization of Western economies sees a slowing of oil demand throughout the second half of the year, but also sees production and export cuts announced by major suppliers as biting into the supply/demand balance through the second half.

The report said global oil demand should increase 2.2 million barrels per day this year and average 102.1 million b/d for all of 2023. But the IEA’s 2.2 million b/d demand estimate comes only after the agency reduced its forecast this month by 220,000 b/d from earlier projections. For a one-month move, that is relatively high.

“World oil demand is coming under pressure from the challenging economic environment, not least because of the dramatic tightening of monetary policy in many advanced and developing countries in the past 12 months,” the report said. The reduction in the agency’s growth estimate is the first one it has implemented this year.

China will account for 70% of the growth in demand, the IEA said. But demand from the nations of the Organization for Economic Cooperation and Development, which are the world’s  market-based economies, most of them based in the West, is “languishing,” the IEA said. That is because of “a grinding slowdown in industrial activity.”

If growth comes in at 2.2 million b/d, it might be the last time it tops that one-year growth number for a while. The IEA now sees 2024 growth at just 1.1 million b/d. One reason is what it expects to be a slowdown in the ongoing post-COVID recovery in China, which should “lose momentum” by next year. The second will be “ever-greater vehicle fleet electrification and efficiency measures.”

While the demand outlook may be down, at 2.2 million b/d, that remains a healthy number. And the IEA sees it coming up against production levels that it expects will be constrained in the second half of the year by the various steps that exporting nations have taken to reduce supply.

Those supply-tightening measures include a cut by the nations of OPEC+ of 1.66 million b/d, announced in early April, implemented in June and coming on top of reductions that already were in place going back to last year; an additional reduction by Saudi Arabia of 1 million b/d announced in early June to be implemented this month; and an announcement by Russia on the same day as the Saudi cuts of its own reduction of 500,000 b/d, though it said it was reducing exports. It did not refer to a production cut.

The actual reductions so far have fallen short of the targets. S&P Global Commodity Insights, in its monthly report on production levels for OPEC+, reported that June output from the group was 41.34 million b/d. That was down just 10,000 b/d from May. And while May was down from the almost 42 million b/d produced in April, that drop was only down about 660,000 b/d, much less than the 1 million b/d that OPEC+ planned on cutting.

Although oil prices did shoot up several dollars in the wake of the early April announcement of the reductions, the long slide resumed soon after that, bottoming out near $72 a barrel for Brent before climbing higher in recent days.

OPEC reductions are not enough to offset increases elsewhere. The IEA reported that global supply was up 480,000 b/d in June, with particular strength coming out of Canada and the U.S., as well as OPEC+ members Kazakhstan and Nigeria.

But the growth in supply “may be about to change,” the IEA said, citing the Saudi 1 million-b/d cut that was to go into effect this month. If the reductions go through, the report said, Saudi output will be down to its lowest level in two years, when it was coming off pandemic-related cutbacks. Excluding that period, the IEA said Saudi Arabia is headed toward a production level it has not seen since 2011.

With Iranian output also set to decline, “we anticipate that the Saudi supply curbs could push global oil production more than 900k b/d below June for this month and next,” the report said. 

The imbalance in the market that is supporting market bulls can be found in the S&P Global numbers. Within its estimate of OPEC+ output, S&P this week said OPEC has been producing about 28.2 million b/d the past two months. 

That figure draws particular attention when it is compared to what the IEA refers to as the OPEC “call.”

The IEA does not estimate future OPEC output, though it does project demand and non-OPEC production. It takes that estimate of demand, subtracts non-OPEC production from it and subtracts production of natural gas liquids from OPEC — which does not vary significantly over time — to calculate the call. That is the amount of oil OPEC needs to supply to have global supply and demand balance, without any inventory draw or build.

The call for full 2023 and 2024 is right about 29.2 million b/d. That puts it 1 million b/d more than the OPEC output number released this week by S&P Global. 

There are two ways of looking at that gap. One is that a 1 million-b/d difference is a rounding error and can be made up by countries that have been increasing their output. The second is that the S&P estimate of OPEC production of 28.2 million b/d is coming before the brunt of the Saudi 1 million-b/d cut, and the gap between production and the call could widen.

One piece of positive news from the perspective of consumers is that the IEA also sees refinery throughput rising this year to average 82.5 million b/d and then increasing next year to 83.5 million b/d. The difference between the estimate of global oil production of more than 102 million b/d and refinery throughput is the fact that the global output numbers are for petroleum and biofuels, so natural gas liquids like propane and butane are in the number, and they are not refined. Neither are biofuels.

One of the reasons for the increased refinery runs — and that means more diesel — is that projects in other parts of the world that had been held back and delayed by the pandemic are starting to become reality. The IEA report cites new refineries in Oman and an expansion in Kuwait as examples.

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