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IEA Warns of Global Recession, Slowing Oil Demand; U.S. Consumption Drops
A plan to slash oil production in November could send prices soaring, exacerbate already entrenched inflation in the United States and Europe, and push the global economy into a recession, the International Energy Agency (IEA) said Thursday.
IEA researchers pointed to a recent OPEC-plus decision to cut oil output by 2 million b/d next month. The researchers said the move could drive supply/demand out of balance and bolster prices as inflationary headwinds threaten to cripple consumer spending and, by extension, major economies.
The U.S. Department of Labor on Thursday said the consumer price index, a key measure of inflation, increased 8.2% in September from the same month a year earlier. That was down from a 2022 peak of 9.1% in June but still four times the level that Federal Reserve Bank (Fed) officials said is healthy. Lofty energy costs – including natural gas prices that doubled this year — have propelled inflation. The Fed has raised interest rates multiple times this year to slow inflation.
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“The relentless deterioration of the economy and higher prices sparked by an OPEC-plus plan to cut supply are slowing world oil demand,” IEA said in its monthly oil report. “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 oil cartel, composed of Saudi Arabia-led OPEC and allies including Russia, helped to drive up Brent crude prices more than 10% after its announced move last week. Further increases are widely expected when the producer group presses ahead with the output cuts next month.
President Biden, along with myriad other U.S. politicians from both sides of the aisle, assailed the OPEC-plus decision. In addition to supply concerns, they said it would bolster Russia’s energy complex as the Kremlin wages war in Ukraine – a conflict the United States opposes.
The sobering outlook from IEA, the Paris-based energy watchdog, came on the same day that the U.S. Energy Information Administration (EIA) said domestic crude supplies were rising while demand fades amid slowing economic activity.
Overall petroleum demand in the United States was down 7% week/week at 19.3 million b/d for the week ended Oct. 6, EIA said in its latest Weekly Petroleum Status Report.
U.S. oil production last week, meanwhile, fell by 100,000 b/d to 11.9 million b/d, EIA said. That pushed output further below the 2022 high of 12.2 million b/d and the record level of 13.1 million b/d reached in March 2020.
U.S. commercial crude inventories, excluding those in the Strategic Petroleum Reserve (SPR), increased by 9.9 million bbl last week, EIA said. At 439.1 million bbl, stocks were only 1% below the five-year average after trailing historic norms by much wider margins over the summer months.
IEA downgraded its oil demand growth estimates by 60,000 b/d for this year to 1.9 million b/d and by 470,000 b/d in 2023 to 1.7 million b/d.
“The OPEC-plus bloc’s plan to sharply curtail oil supplies to the market has derailed the growth trajectory of oil supply through the remainder of this year and next, with the resulting higher price levels exacerbating market volatility and heightening energy security concerns,” IEA researchers said.
This followed OPEC’s projected demand decline a day earlier.
OPEC lowered its growth forecast for this year by 460,000 b/d to 2.64 million b/d. For next year, the group dropped its estimate by 360,000 b/d to 2.34 million b/d. Cartel researchers cited economic weakness, supporting the case for lower output.
Critics, however, accused OPEC and its allies of trying to bolster prices and profits ahead of winter, in part to boost Russia’s finances and its ability to wage war in Eastern Europe.
The Biden administration said the production cut would threaten supplies and increase the likelihood the global economy could tilt into recession. The president had lobbied OPEC leaders to maintain or even increase production to keep downward pressure on oil prices.
In response to the planned cut, the White House said it would order additional releases from the nation’s SPR “as necessary,” reversing a plan to end SPR drawdowns next month. Top Biden aides also stated that the White House would “consult with Congress on additional tools and authorities” to limit OPEC’s “control” over crude prices, potentially including new anti-price fixing legislation.
In the United States, meanwhile, consumption has dropped so far this fall, according to EIA.Total petroleum products supplied over the last four-week period averaged 20.0 million b/d, down 4% from the same period last year. Over the same stretch, motor gasoline demand averaged 8.7 million b/d, down 6%, while distillate fuel consumption averaged 4.0 million b/d, down 4%. Jet fuel product supplied was up 3%, an exception to the trend.
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