Tensions are rising between the International Energy Agency (IEA) and OPEC. While there has always been tension between the IEA, which supposedly represent the interests of oil consuming countries and OPEC, a cartel that can restrict supplies, the tensions between the two organizations are at a fever pitch and the bad blood is boiling over the barrel.

The IEA, in their monthly report, calls out OPEC for their recent production cut saying that OPEC is, “aggravating an expected oil supply deficit in second half of 2023 and boosting oil prices at a time of heightened economic uncertainty, even as industrial activity slows in the world’s largest economies and production growth outside the alliance appears robust.” OPEC for their part disagrees that producers outside the alliance are being honest brokers as far as keeping production high especially when here in the US the Biden administration is slowing down permits and the EPA is trying to force Americans out of their internal combustion cars and trucks.

The EIA complains that OPEC’s self-described “precautionary move” was likely to be bad news for consumers at a time of heightened economic uncertainty. “Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly,” the IEA said. “This augur badly for the economic recovery and growth.”

OPEC is looking at this as self-survival as consuming nations not only tried to influence their production decisions by relying on oil from strategic reserves before the war in Ukraine but also dared to try to cap the price oil in Russia which they view as a threat, not just to Russia but the cartel as a whole. Now we are going to see if that price cap will fail because as the IEA points out the weighted average Russian oil price has moved above the $60 a barrel since April 5th the first time since the G7 cap was introduced last year. Japan has already asked for a waiver to buy that oil. We will now see whether other consuming nations have the resolve not to pay over $60 a barrel for Russian crude and whether or not Russia will have the resolve to not sell to buyers under the current market price.

OPEC in their defense can cling to its concern that we are going into a recession, and they have the Fed Minutes to back them up. OPEC does not want to create another oil supply glut if the global economy crashes.

While we are seeing some signs of softening in the global economy, it seems that the impact on oil demand has so far been muted. Asian oil demand is soaring, and US demand is very strong. US Oil production seems to have plateaued and it looks like the IEA supply deficit call for later in the year is right on target and they have no one to blame but themselves.

The IEA focus in recent years has been pushing the green energy transition. They took their eyes off the ball on what should have been fossil fuel energy security. The IEA instead discouraged investment in fossil fuels that will make the looming supply gap look minuscule in coming years unless we dramatically change course in global energy policy. I think it’s rich that the IEA has the nerve to call out OPEC for not being worried about consumers confronted by high prices not having enough money for basic necessities when the green energy policies they have promoted is the number one cause for sharply rising energy prices.

As a reminder the world oil demand growth estimate for 2022 remains at 2.5 mb/d, broadly unchanged from last month’s assessment. For 2023, it is also unchanged from the last month’s assessment at 2.3 mb/d. OPEC made e minor downward adjustments reflecting the latest developments in the OECD region, primarily in OECD Americas and OECD Europe. However, the stronger-than-expected demand seen in non-OECD in January and February necessitated some upward revisions. Oil demand in the OECD is forecast to increase by 0.1 mb/d in 2023, while the non-OECD is forecast to grow by 2.2 mb/d

OPEC put world oil supply and the non-OPEC liquids supply growth estimate for 2022 remains at 1.9 mb/d, broadly unchanged from the previous month’s assessment. The main drivers of liquids supply growth for 2022 were US, Russia, Canada, Guyana, China and Brazil, while the largest declines were from Norway and Thailand. For 2023, non-OPEC liquids supply growth remains broadly unchanged from last month and is forecast to grow by 1.4 mb/d. The main drivers of liquids supply growth are expected to be the US, Brazil, Norway, Canada, Kazakhstan and Guyana, while the decline is expected primarily in Russia. Large uncertainties remain over the impact of the output prospective for US shale in 2023. OPEC NGLs and non-conventional liquids are forecast to grow by 0.1 mb/d in 2022 to average 5.4 mb/d and by 50 tb/d to average 5.4 mb/d in 2023. OPEC-13 crude oil production in March dropped by 86 tb/d m-o-m to an average of 28.80 mb/d.

The IEA said that, “While oil demand in developed nations has underwhelmed in recent months, slowed by warmer weather and sluggish industrial activity, robust gains in China and other non-OECD countries are providing a strong offset. In 1Q23, OECD oil demand fell 390 kb/d y-o-y, but a solid Chinese rebound lifted global oil demand 810 kb/d above year-earlier levels to 100.4 mb/d. A much stronger increase of 2.7 mb/d is expected through year-end, propelled by a continued recovery in China and international travel. For 2023 as a whole, world oil demand is forecast to rise by an average 2 mb/d, to 101.9 mb/d, with the non-OECD accounting for 87% of the growth and China alone making up more than half the global increase.

Meeting those gains may prove challenging as the new OPEC+ cuts could reduce output by 1.4 mb/d from March through year-end, more than offsetting a 1 mb/d increase in non-OPEC+ production. Growth from the US shale patch, traditionally the most price-responsive source of more output, is currently limited by supply chain bottlenecks and higher costs.

Our oil market balances were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge. The latest cuts risk exacerbating those strains, pushing both crude and product prices higher. Consumers, currently under siege from inflation, will suffer even more from higher prices, especially in emerging and developing economies according to the IEA.

Paul Young at Quantum Commodity Intelligence wanted me to point out that the Brent/Dubai cash spread inverted for the first time in over six months Thursday, as OPEC+ cuts and a firmer demand outlook for Asia compared to Europe lifted the Middle East benchmark above its North Sea counterpart. He said that the Brent/Dubai cash spread for June cargoes was assessed by Quantum at -$0.08/b, the first negative point since late September. Brent/Dubai was already in decline since the start of the year with the spot spread at over $4/b in early January, but lingering fears over recession in the West coupled with a glut of light sweet crude has gradually eroded the premium for Brent. The front spread averaged around +$0.80/b last month, but the surprise decision at the start of the month that a number of OPEC+ members will cut production from May has been enough to flip the closely-watched spread.

Of the approximate 1.15 million bpd reductions, around 1 million bpd will come from Middle East Gulf producers with close to 100% compliance expected from Saudi Arabia, UAE, Kuwait, Iraq and Oman.

On the demand side, China remains the primary driver, underlined by Thursday’s OPEC report forecasting that China’s oil demand is now expected to average 15.61 million bpd this year, up by 760,000 bpd year-on-year. By contrast, crude demand growth has been adjusted lower for “all four quarters of 2023, to reflect the most recently received data for first quarter of 2023 and account for an anticipated decline in economic activity in OECD Americas and OECD Europe,” said OPEC.

Natural gas is still seeking a bottom. It may be time to start looking at options even as there is a limited supply of them.

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