The surprise OPEC+ cuts could push the oil market into an even higher supply deficit later this year and weigh on consumers and global economic recovery and growth, the International Energy Agency (IEA) said on Friday.
“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 agency said in its Oil Market Report for April today.
“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,” the agency noted.
Some of the biggest OPEC+ producers announced early this month they would remove another 1.16 million bpd from the market between May and December 2023, on top of Russia’s 500,000-bpd cut which was extended until the end of the year.
The IEA believes the recent build in commercial inventories could have played a part in the OPEC+ decision to further restrict supply.
OPEC itself said on its own report on Thursday that commercial OECD oil stockpiles had been rising in recent months, pointing to a less tight market than at this time last year.
The IEA said in its report on Friday, commenting on the OPEC+ announcement, “While apparently a move to support declining prices amid financial turmoil in mid-March, rising global oil stocks may have also contributed to the decision.”
The trend of rising stocks was already reversing by March, with OECD industry stocks plunging by 39 million barrels, their biggest monthly decline in over a year, according to IEA’s estimates.
China’s resurging demand, especially in the latter half of 2023, is set to drive global oil demand up by 2 million bpd in 2023 to a record 101.9 million bpd, the agency said, leaving its estimates unchanged from last month’s report.
But the OPEC+ cuts risk creating a significant supply deficit, the IEA said today, noting that meeting demand growth could be 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,” the agency noted.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana Paraskova
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.
Statistics Canada says the unemployment rate rose to 5.2 per cent in May, marking the first increase since August 2022.
The rate for Newfoundland and Labrador rose slightly to 10.2 per cent from 10.1. In metro, the jobless rate in May hit 5 per cent, a slight increase from the 4.9 recorded in April.
The job report comes two days after the Bank of Canada raised its key interest rate by a quarter of a percentage point, citing concerns about a string of hot economic data, including low unemployment.
Canada’s labour market showed minor signs of softening in May, but economists and other experts said the Bank of Canada likely wouldn’t read the numbers as a sign that its rate-tightening campaign aimed at bringing down inflation is working.
The numbers released Friday said the economy lost 17,000, though employment overall was little changed.
Randall Bartlett, senior director of Canadian economics at Desjardins, cautioned that job losses were concentrated among the youngest workers in Canada as they enter the summer jobs season, and “not necessarily characteristic of what we’re seeing in the underlying labour market.” He said the job losses can’t yet be seen as a “trend.”
“We need to see how this shakes out in the months ahead, and then we’ll decide what it means for monetary policy,” Bartlett told BNN Bloomberg in a television interview.
Dominique Lapointe with Manulife Investment Management noted “small loss” mostly among the younger age group of workers should be interpreted with caution, as seasonal adjustments can be challenging for that demographic. He also pointed out that employment rose among core-aged workers.
Lapointe said he is expecting another rate hike next month based on recent inflation and GDP readings. He said the jobs numbers aren’t significant enough to change the central bank’s path.
“I don’t think this morning’s (Labour Force Report) report would change what’s going to happen in July. We’d probably need to see way more weakness in other economic indicators before the next meeting for them to change their course,” he said.
Jay Zhao-Murray, FX Analyst at Monex Canada, noted that the data that went against economists’ expectations for job gains in May, but agreed that the numbers wouldn’t shift the central bank’s thinking.
“With employment cooling on the whole, this latest report does weaken the case for further hikes from the Bank of Canada, but given the details and composition of employment changes, we do not think it would materially change the Bank’s latest view on the economy,” he said in a written statement.
He said he is expecting another 25-basis-point rate hike from the Bank of Canada in July, “unless the subsequent data also confirm the negative signal from today’s report.”
Economist Tuan Nguyen of RSM Canada, meanwhile, said “there are reasons to believe that May’s decline in net jobs is not a fluke,” given that most of the job losses were in business, professional services, and trades.
Taken with an uptick in the unemployment rate, he pointed to signs that “a long-awaited softening of the labor market has finally arrived.”
“Following Friday’s job data, the Bank of Canada’s decision to hike the rate to 4.75 per cent … might be the last one in this cycle. Nevertheless, we continue to believe that rates should remain at that level at least until the end of the year to ensure substantial easing of inflation,” Nguyen said in a written statement.
WAGES
Wages, which the Bank of Canada has zeroed in on as a particular concern in its inflation fight, rose 5.1 per cent year-over-year in May.
Bartlett made the case that wage growth in Canada is more “subdued” than it might appear.
He noted that StatsCan’s monthly wage reading is one of several wage indicators that the Bank of Canada looks at, and others appear to be decelerating more quickly, meaning that “wages are not the concern we had anticipated” when it comes to the possibility of a “wage-price spiral” some economists fear could push inflation higher.
Regardless, Bartlett said he expects the Bank of Canada will interpret the labour force reading as a sign that Canada’s labour market remains “very tight.”
“It needs to see the unemployment rate move meaningfully higher (and) the job vacancy rate move meaningfully lower in order to be able to see wage growth come down to a level that’s consistent with two per cent inflation,” he said.
CONSUMER SPENDING CLUES
As for the sectors where people lost jobs in May, Bartlett said the data holds clues that Canadians are still spending money despite the high-interest rate environment.
“It’s not necessarily in sectors where you would think tight monetary policy and higher interest rates would be leading to job losses,” Bartlett said.
Accommodation, food services, arts and recreation were not hit particularly hard with losses, but those are areas where people generally cut back on spending in tough economic times, Bartlett said.
“We may see the consumer continue to be relatively healthy in the second quarter, and it may be maybe pointing to that still,” he said.
