oil market imbalance widens due to OPEC+ production cuts and rising demand

The imbalance in the oil market is increasing due to the simultaneous reduction in production by OPEC + countries and growth in demand, which does not yet confirm fears of a slowdown in global activity, according to a report from the International Energy Agency (IEA). Both factors could support further price increases, especially if Saudi Arabia and Russia maintain production restrictions. Discounts on Russian grades of oil to Brent also continue to decrease, which supports the growth of export earnings with comparable volumes of deliveries.

Additional production cuts in July coincided with improved macroeconomic sentiment and strong demand, the IEA said in an August report. Inventories continue to dwindle, so the continuation of voluntary restrictions imposed by Saudi Arabia and Russia will lead to further price increases, the agency believes. Dubai Crude oil (this is the main benchmark for oil supplies to Asian countries) turned out to be more expensive than Brent for the first time in 28 years.

Global demand in June exceeded 103 million b/d, in August the figure may set a new record – in the second quarter, even the OECD countries show an increase in consumption after two quarters of decline, while activity in the petrochemical sector is growing in China. High demand, coupled with restrictions on the operation of refineries, has led to higher prices for petroleum products. On average for the year, demand growth could reach 2.2 million bpd (up to 102.2 million bpd – this is the highest annual average), but next year this figure will slow down to 1 million bpd, the IEA believes.

Oil supply, by contrast, is rapidly declining – in July it fell by 910 thousand b / d due to OPEC+ countries cutting 1.2 million b / d (to almost a two-year low), after Saudi Arabia voluntarily cut production by 1 million b/s came into force. The total production of OPEC + is now at the level of 50.7 million b/d, since the beginning of the year it has already decreased by 2 million b/d. Over the same period, producers outside the countries participating in the deal increased production by 1.6 million barrels per day to 50.2 million barrels per day (the increase was provided by the United States, Brazil and Guyana), but they are unlikely to be able to increase it at a similar pace until the end of the year , noted in the IEA.

Russian oil production in July decreased by 50 thousand b/d to 9.4 million b/d, while the total production of oil and condensates amounted to 10.74 million b/d, which is 660 thousand b/d less than in February 2022 (on average this year, according to the IEA forecast, the level of production may decrease by 230 thousand b/d year-on-year to 10.86 million b/d). At the same time, export supplies remained at the same level as in June (then they updated the minimum since March 2021), amounting to 7.3 million bpd (at the same time, supplies of petroleum products increased by 200 thousand bpd, to 2, 7 million b/d, while oil, on the contrary, decreased by the same amount, to 4.6 million b/d). In June and July, total exports were 680,000 b/d lower than in March-May.

Russian oil prices are already steadily above the ceiling of $60 per barrel – in July, the weighted average export price increased by $8.84 per barrel, to $64.41 per barrel, by early August, all grades were trading at prices above $70 per barrel, the IEA reports. with a reference to Argus data – now all deliveries are subject to restrictions on transportation and insurance of the G7 countries and the European Union. Discounts were shrinking, despite the growth in the cost of Brent (for Urals – up to $16 per barrel by early August). The IEA points out that discounts on Dubai Crude for Indian buyers (for deliveries to the country’s west coast) are now only one third of the level of the first quarter (by early August, the average price of such deliveries was $80 per barrel). At the same time, the IIF points to the risks of increasing discounts due to an increase in insurance and transportation costs for deliveries from the Black Sea ports in the event of attacks on commercial ships.

The increase in prices also affected the growth of revenues from the export of oil and petroleum products – they were at their highest since November 2022, amounting to $15.3 billion against $12.8 billion in June. Revenues from the export of petroleum products grew more significantly than from oil (plus $1.6 billion and $0.9 billion). In September, meanwhile, the volume of voluntary production cuts should decrease from 500,000 to 300,000 barrels per day.

Tatyana Edovina