Global oil markets are facing a supply shortfall of more than 3 million barrels per day next quarter, potentially the biggest shortfall in more than a decade, as Saudi Arabia extends its output cuts.
The latest data released by OPEC shows why the kingdom’s supply squeeze, amid a period of record demand, has pushed oil prices above $90 a barrel in London. Riyadh announced last week that it will extend a further output cut of 1 million barrels a day until the end of the year, even as markets are already tightening.
Global oil inventories, which have depleted sharply this quarter, are forecast to fall even more sharply by about 3.3 million barrels per day in the next three months, according to forecasts published in a report by the Organization of the Petroleum Exporting Countries. Oil Exporting Countries this Tuesday.
If carried out, it could be the largest inventory drawdown since at least 2007, according to a Bloomberg analysis of figures released by the OPEC secretariat in Vienna.
The kingdom’s strategy, aided by export cuts from Russia, also a member of OPEC+, threatens to generate renewed inflationary pressures on a fragile global economy. Diesel prices have risen in Europe, while US airlines are warning passengers to brace for higher costs.
It could even become a political issue for US President Joe Biden as he prepares for next year’s re-election campaign, with domestic gas prices nearing the sensitive threshold of $4 on gallon The White House has said the Saudi move does not complicate its economic efforts.
According to the report, OPEC’s 13 members pumped an average of 27.4 million barrels a day this quarter, or about 1.8 million less than it believes consumers needed. If the organization keeps output unchanged, as group leader Saudi Arabia has indicated it plans to do, the gap between supply and demand will nearly double in the final three months of the year . OPEC estimates that it needs to provide 30.7 million barrels per day in the fourth quarter to meet consumption.
Although OPEC officials regularly say their goal is to keep global oil markets in balance, the latest projections suggest they intend to cut inventories quickly. Crude stockpiles in developed economies are already about 114 million barrels below the 2015-2019 average, according to the report.
The reduction in supply reflects the financial needs within the organization.
Saudi Arabia may require prices of nearly $100 a barrel to cover government spending as well as Crown Prince Mohammed Bin Salman’s ambitious projects, Bloomberg Economics estimates show. The kingdom has spent considerable sums on ventures ranging from the futuristic city known as Neom to the acquisition of top footballers such as Cristiano Ronaldo for its national league.
The report kept estimates for global demand and supply unchanged this year and next. OPEC and its allies will meet on November 26 to review production policy for next year.
While the Saudi-engineered tightening of supply reflects the influence the kingdom still holds over energy markets, the International Energy Agency served as a reminder Tuesday of how that control could be weakened.
As consumers shift to renewable energy to avoid catastrophic climate change, “we may be witnessing the beginning of the end of the fossil fuel era” with demand peaking this decade, the IEA said.
