Oil Prices May Rally Next Year as Russian Exports Sink, IEA Says

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(Bloomberg) -- Oil prices could rally next year as sanctions squeeze Russian supplies and demand beats earlier expectations, the International Energy Agency said. 

Russia’s output — which defied the agency’s previous predictions of collapse this year — is poised to plunge 14% by the end of the first quarter, the Paris-based IEA said in a report on Wednesday. If that forecasts holds true, it could reverse the recent trend in oil futures, which have retreated to $80 a barrel in London after their worst weekly slump in four months.

“While lower oil prices come as a welcome relief to consumers faced by surging inflation, the full impact of embargoes on Russian crude and product supplies remains to be seen,” the IEA said. “As we move through the winter months and toward a tighter oil balance in the second quarter, another price rally cannot be ruled out.”

The IEA, which advises major economies, bolstered forecasts for global oil demand in 2023 by 300,000 barrels a day amid vigorous growth in India and surprising resilience in China. Consumption will grow by 1.7 million barrels a day next year to average 101.6 million a day.

Still, it’s a softer warning on prices than recent messages from the agency, which a few weeks ago was highlighting the risk of a supply squeeze and urging the OPEC+ coalition to reverse its latest production cuts.

The IEA acknowledged that Russian exports have continued to swell despite its repeated predictions that an international boycott would slash shipments. Moscow’s oil shipments climbed to a seven-month high of 8.1 million barrels a day in November, although revenue fell due to lower prices, according to the report.

Russia’s resilience also contributed to shallower cutbacks than expected from OPEC+, the IEA said. The 23-nation group led by Saudi Arabia reduced supplies last month by just a quarter of the 2 million barrels-a-day it had announced, as many members were already pumping below their designated quotas.

But global markets are on track to tighten up in 2023, according to the IEA.

Russian output will finally begin to buckle this month as European Union sanctions over its invasion of Ukraine force the country to shut in about 400,000 barrels a day, the agency predicts. 

Production will tumble from current levels of about 11.2 million barrels a day to 9.6 million a day by the end of the first quarter, according to the report. President Vladimir Putin said last week that the country would reduce output rather than sell to buyers at the capped price level demanded by the G-7. 

Meanwhile, “buoyant” consumption of gasoil in emerging economies suggests that world oil demand will grow at a faster rate next year than previously estimated. India has led the expansion in recent months, but will be overtaken again by China next year as the Asian giant emerges from strict “Covid Zero” restrictions. the IEA said.

“While restriction levels in the country remain high, the stage is now set for a progressive reopening in 2023,”according to the report. 

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