Saudi Arabia and Russia’s decision to extend their oil production cuts has paid off, with both countries set to see their oil revenues increase. Energy Aspects analysis quoted by the Wall Street Journal estimates that Saudi Arabia’s oil revenues could be $30 million a day higher this quarter compared to the last one, while Russia’s oil revenues could expand by $2.8 billion over the same period. The cuts have pushed oil prices higher, as demand continues to remain strong. However, a recent report from the International Energy Agency (IEA) warns that oil demand must drop by about a third by 2030 in order to achieve net-zero emissions targets.
The IEA’s messaging on the need for a reduction in oil demand was not welcomed by oil producers, particularly Saudi Arabia, who argue that the low appetite for investments in new oil and gas supply will jeopardize supply security. JP Morgan’s head of energy equity research, Chrystian Malek, predicts a volatile supercycle for hydrocarbons, with oil prices potentially reaching $150 per barrel, and prices staying above $100 until the end of the decade due to short supply. However, the impact of high oil prices on demand remains unclear, with some suggesting that demand destruction may only occur when crude oil prices reach $100 to $110 per barrel and gasoline prices rise to $4.00 to $4.25 per gallon.
Despite rising oil prices, demand for oil in India has continued to rise, indicating that the impact of high prices on demand may vary across countries. The success of Saudi Arabia and Russia’s production cuts demonstrates the ongoing resilience of oil demand, but the key question is when demand will begin to be eroded by high prices. As the IEA highlights the need for a reduction in oil demand, oil producers face the challenge of balancing their desire for higher prices with the risk of demand destruction caused by these higher prices.