Opec+ cuts could set off global recession, IEA warns as it lowers oil demand growth

A decision by the Opec+ oil producer group last week to cut output could hurl the global economy into a recession, the International Energy Agency warned on Thursday as it slashed its world oil demand growth estimates for 2022 and 2023.

“The relentless deterioration of the global economy and higher prices sparked by an Opec+ plan to cut supply are slowing world oil demand. With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” the IEA said.

IEA’s stern caution comes on the heels of a chilling forecast by the International Monetary Fund of higher recession risk amid bleak global outlook.

Oil prices firmed on Thursday, finding continued support from the Opec+ decision to cut supplies. Brent crude futures rose 49 cents, or 0.5 per cent, to $92.94 a barrel in early trading. US West Texas Intermediate crude was up 37 cents, or 0.4 per cent, at $87.64 a barrel.

The IEA warning underscores a growing rift between Saudi Arabia, the world’s top oil exporter, and the US and allies. US President Joe Biden vowed unspecified “consequences” for relations with Saudi Arabia after the Opec+ move, but Riyadh rejected criticism and said the move was not political and aimed at balancing the market and curbing volatility.

The US accused Saudi Arabia of bowing to Moscow, which objected to a Western cap on the price of Russian oil in response to its invasion of Ukraine.

Countering warnings and criticisms from the US and IEA on the implications of the supply cut, the Saudi foreign ministry stressed the “purely economic context” of the oil cut. It also said the kingdom views its relationship with the United States as a “strategic one” and stressed the importance of mutual respect.

In an interview on CNN’s Connect the World with Becky Anderson, Saudi Arabian Minister of State for Foreign Affairs Adel Al Jubeir said his country partnered with Russia to slash oil production in order to stabilise markets and denied that there were political motives behind the decision. Saudi Arabia is not siding with Russia. Saudi Arabia is taking the side of trying to ensure the stability of the oil markets.”

Al Jubeir, who is also the country’s climate minister, said the production cut was made to avoid major swings in the price of oil, which can affect consumers worldwide, and pointed to the fact that the price of oil has gone down since the reduction was announced last week.

“Saudi Arabia does not politicise oil. We don’t see oil as a weapon. We see oil as our commodity. Our objective is to bring stability to the oil market. And our record is very clear on this not over the past few weeks but over the past decades.”

Citing the possibility of a recession in several European countries and increasing risks for emerging economies, the Paris-based IEA, which includes the United States and other top consumer countries, expects oil demand to grow by 1.9 million barrels per day in 2022, down from its two million bpd projection in September.

The IEA also announced a steep cut in its 2023 projection, with oil demand growth now expected at 1.7 million bpd, 19 per cent lower than its previous estimate of 2.1 million bpd.

Capacity constraints plaguing output in other Opec members mean Saudi Arabia and the UAE will deliver most of the reductions, while new G7 and European Union sanctions on Russia could further tighten global supply, the IEA said.

The EU this month endorsed a plan by the G7 club of wealthy nations to impose a cap on prices for Russian oil exports, a complex set of new global sanctions aimed at depriving Moscow of revenue for its invasion of Ukraine.

The IEA's projections come a day after Opec lowered its global oil demand forecast for 2022 and 2023, citing Covid-19 restrictions in China, economic challenges in Europe and inflationary pressures in key economies.

Global crude oil stocks rebounded by 36.5 million barrels in August, while OECD oil stocks rose by 15 million barrels.

“They would have been significantly lower had it not been for the release of 185 million barrels of IEA member country government stocks from March through August,” the IEA said.

— issacjohn@khaleejtimes.com