Saudi Arabia and Russia have decided to extend their oil production cuts, a move initially thought to be aimed at boosting oil prices. The decision to prolong these cuts was contrary to expectations, with many believing it was primarily driven by the desire to raise oil prices. The International Energy Agency (IEA) has come under criticism for its forecasts, as it has been accused of shifting from forecasting to engaging in political advocacy.
Despite the growing sales of electric vehicles and the increasing use of alternative energy sources, global oil demand remains robust. This has challenged many predictions regarding the future of the oil market. Saudi Energy Minister Abdulaziz bin Salman emphasized that the decision to extend production cuts was about making informed choices based on available data, rather than simply raising prices.
Initially, the prevailing belief was that the production cuts were motivated by the need for higher oil prices, as Saudi Arabia’s budget relies on prices exceeding $70 per barrel of Brent crude. These higher prices were seen as necessary to support the Crown Prince’s ambitious plans to reduce the country’s dependence on oil revenues.
However, Bin Salman himself has expressed concerns about the demand side of the oil equation, echoing the worries of many traders who kept oil prices low in the first half of the year. He highlighted uncertainties surrounding Europe’s economic growth, central bankers’ decisions on interest rates, and the performance of the U.S. economy in a global context.
The IEA shares concerns about the oil market, but from a different perspective. It is worried that there won’t be enough supply to meet the accelerating demand it anticipates. This acceleration in demand has surprised the IEA, as it previously forecasted peak oil demand to occur before 2030 and recommended halting new oil and gas exploration by 2021.
Bin Salman emphasized the importance of cautious optimism, stating that it’s better to believe in forecasts when they align with reality. He acknowledged that supply and demand forecasts are not always accurate, citing the example of overly optimistic projections of Chinese economic growth earlier in the year.
Despite economic challenges in major markets like Europe and the United States, oil demand has remained strong. Even as electric vehicle sales surge, oil demand in these markets has not decreased. This resilience of oil demand challenges the notion that the transition to alternative energy sources is rapidly replacing oil.
Saudi Arabia’s approach may be anticipatory, as it seeks to maximize its resources before the potential peak in oil demand. In a context where predictions suggest oil and gas are on the decline due to the energy transition, the Saudi strategy could be seen as prudent. Bin Salman criticized the IEA for its forecasts regarding peak oil demand and the growth of clean energy technologies, accusing the agency of shifting from being a market assessor to a political advocate.
This shift in the IEA’s role has raised concerns about the credibility of its forecasts. Nevertheless, these forecasts continue to influence decisions, such as the subsidy race in Europe and the United States, which is promoting the shift away from oil and gas in favor of alternatives. Investors also rely on these forecasts when deciding where to allocate their funds.
Given this political environment, it is understandable that Saudi Arabia’s energy minister would prefer to err on the side of caution. This is particularly true if carbon taxing becomes more widespread, as it could further reduce demand for oil.
