Oil prices recovered after a sharp fall in mid-July to trade above $100 per barrel after President Joseph R. Biden Jr. ended a visit to Saudi Arabia without securing a commitment for an immediate increase in oil production. While the market appears to have responded to indications of softer demand, supply-side concerns continue to dominate market sentiment as the OPEC+ alliance of OPEC and non-OPEC oil producers prepares to unwind the last of the production cuts implemented in April 2020.

The end of production curbs on August 31 will complete the cycle of monthly output increases that were agreed upon in July 2021 as demand began to recover from the ravages of the coronavirus pandemic. The OPEC+ ministers, representing 23 oil-producing countries, brought forward by one month the schedule to restore in full the last of the 9.7 million barrels per day they withdrew from the market at the start of the pandemic. The decision to speed up the tapering of production cuts came partly in response to calls by major consuming countries and blocs, including the United States, United Kingdom, and European Union, to open the taps to counter the potential loss of Russian supplies as well as a post-pandemic rebound in demand.

In theory, the end of output restrictions should result in a supply boost beginning in September unless ministers decide otherwise at the next OPEC+ meeting August 3. But a number of producers are close to their maximum output capacity and are struggling even now to meet higher quotas due to underinvestment in their energy sectors during previous low-price cycles. Erratic supplies from Libya, where political stability remains elusive, and sanctions against Iran and Venezuela have capped output growth from three key OPEC producers.

Oil prices sank below $95/bbl July 14, the day after the start of Biden’s visit to the Middle East. His trip, which began in Israel, concluded in the Saudi coastal city of Jeddah, where he met with leaders from Saudi Arabia and the other Gulf Cooperation Council states as well as those from Jordan, Egypt, and Iraq. Biden left the region without securing a commitment from Saudi Arabia for an immediate increase in oil supply to help bring down prices at the pump in the United States. The fact that oil prices had already declined during his visit would have weakened any argument for a supply boost at this time.

Biden promised some relief to U.S. motorists would come as a result of his discussions in Saudi Arabia, which shares equal status with Russia in OPEC+ management. At a news conference in Jeddah, he said his talks with Saudi leaders included “a good discussion on ensuring global energy security and adequate oil supplies to support global economic growth. And that will begin shortly.” He added: “And I’m doing all I can to increase the supply for the United States of America, which I expect to happen. The Saudis share that urgency, and based on our discussions today, I expect we’ll see further steps in the coming week.”

But a senior Saudi official made clear that the kingdom did not share the same sense of urgency, stating that decisions on supply policy would be determined by the market. “We listen to our partners and friends from all over the world especially consumer countries,” Saudi Foreign Minister Prince Faisal bin Farhan told reporters. “But at the end of the day, OPEC+ follows the market situation and will supply energy as needed.”

Riyadh may want to mend frayed relations with Washington, a historic ally, but it also wants to preserve the more recent energy alliance with Moscow. Saudi Minister of State for Foreign Affairs Adel al-Jubeir also made it clear in an interview with Bloomberg that the kingdom would act in concert with its OPEC and OPEC+ partners and supply more oil if there is a shortage. But he blamed what he called geopolitical sentiment for recent sharp gyrations in oil prices rather than an imbalance between supply and demand. “We follow the supply and demand situation very carefully … If there’s a potential shortage then we work on increasing production through and with our OPEC partners and OPEC+ partners,” he said.

For now, the market is somewhat balanced, if tight, because of depleted inventory levels and OPEC+ production coming in consistently below target month after month. Fears of an impending shortfall in Russian supplies as a result of a partial EU embargo on Russian crude oil imports agreed upon in May for the second half of the year have kept prices high. The decision by OPEC+ to accelerate its production increases by a total 1.3 mb/d in July and August, a month ahead of schedule, provided some relief and might have prevented a further spike in oil prices, which producers would prefer to avoid amid signs of a demand response. But, after having fallen in mid-July, benchmark Brent crude oil prices recovered to trade above $100/bbl as Biden concluded his visit to Saudi Arabia.

The high oil prices that prevailed during the first half of the year and a grim global economic outlook have started to have an impact on demand growth in much of the industrialized world and China, where economic growth has slumped as a result of lockdowns and slower manufacturing activity.

Diverging forecasts on expected supply and demand balances for the rest of the year and 2023 by OPEC, the International Energy Agency, and the U.S. Energy Information Administration released in July illustrate the difficulty of making precise predictions on market direction.

“Rarely has the outlook for oil markets been more uncertain,” noted the IEA in its July Oil Market Report. It added, “A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side. For now, weaker-than-expected oil demand growth in advanced economies and resilient Russian supply has loosened balances.” However, the IEA noted that the “deceleration of economic activity,” as a result of lower global economic growth forecasts by the International Monetary Fund and warnings of a possible recession, was “adding further uncertainties to our oil demand forecast.”

The IEA made only minor downward revisions to oil demand forecasts for 2022 and 2023. It now projects demand growing by 1.7 mb/d compared with 1.8 mb/d in its June estimate. By 2023, the IEA projects demand rising by 2.1 mb/d rather than by the 2.2 mb/d it forecast a month earlier. OPEC is far more optimistic in its demand outlook, which it expects will grow by 2.7 mb/d in 2023 on the back of “still solid economic performance in major consuming countries, as well as improved geopolitical developments and containment of COVID-19 in China.” The EIA’s demand forecast is somewhere in the middle, with a growth forecast of 2.81 mb/d for 2023. By the final quarter of 2023, the EIA expects global demand to reach 101.74 mb/d, the IEA 102.69 mb/d, and OPEC 105.40 mb/d, all of which would take demand above pre-pandemic levels.

Yet even if these demand estimates are revised further, OPEC+ producers would have to pump flat out to avoid a supply shortfall, particularly if Chinese demand, which has been subdued recently during coronavirus-induced lockdowns, stages a strong recovery. This would put further pressure on demand for refined oil products, which are also trading at near-record highs because of tight global refining capacity and the loss of diesel and gasoline supplies from Russia.

The lifting of OPEC+ output restrictions will expose the weaknesses of an oil and gas industry that is now feeling the full impact of nearly eight years of investment declines in the upstream and downstream hydrocarbon sectors. This investment shortfall set the stage for a crisis that emerged before the Ukraine invasion and cannot be blamed entirely on the energy transition, though, the net-zero drive across much of the developed world has also played a part in the fragmentation of the energy system.

Saudi Arabia’s crown prince and de facto ruler, Mohammed bin Salman, at the start of the Jeddah summit said “adopting unrealistic policies to reduce emissions by excluding main sources of energy will lead in coming years to unprecedented inflation and an increase in energy prices.” Saudi Arabia was doing its part to raise production capacity but will not go beyond an already planned expansion to 13 mb/d, he added, implying that the kingdom alone would not shoulder the responsibility of increasing production capacity. The addition of new capacity is underway by Saudi Aramco, but the full increment is not due before 2027.

Saudi Arabia holds the bulk of the world’s spare production capacity along with the United Arab Emirates, which is why world leaders have been calling on their capitals in recent months in search of alternative supplies to Russian oil. Together, Saudi Arabia and the UAE would have 2.15 mb/d of spare capacity in August. This equals the volume of crude oil the EU imported from Russia in 2021. So far, Russian crude oil exports shut out of the European market have been redirected to Asia, mainly China and India, which has been buying record volumes of Russian oil at a discount rather than from its traditional Middle Eastern suppliers.

But continued flows of Russian crude to the world market cannot be guaranteed, and Russia’s production fell below the OPEC+ allocation in June, according to a survey by price-reporting agency Platts. It estimated Russian crude oil production was 913,000 b/d below quota at 9.29 mb/d in June.

As OPEC+ returns the last batch of barrels to the market in August and possibly increases production further in September if no new restrictions are put in place, spare production capacity would decline and leave the market with few safety valves to withstand a supply shock should one emerge, particularly if Russian production sinks further as the EU embargo comes into effect. The EU agreed in late May to reduce Russian oil imports by 90% by the end of the year. If the ban is implemented in full, supply may tighten further, and the onus would be on the few producers with spare production capacity to step in if demand holds.

Saudi Arabia has consistently put its sustainable oil production capacity (production that can be brought online within 30 days and sustained for 90 days) at 12.5 mb/d, including output from the Neutral Zone it shares with Kuwait. The IEA estimates the OPEC giant’s total maximum sustainable capacity at 12.2 mb/d. Saudi Arabia’s OPEC+ quota will rise from 10.8 mb/d to just above 11 mb/d in August, a monthly level the IEA notes it has only reached twice previously. But the IEA believes the OPEC kingpin can sustain output of around 11 mb/d for an extended period “though that effort could prove to be a challenge given its mature reservoirs.”

If OPEC’s demand forecast for 2023 materializes, its members would need to produce 32 mb/d by the end of 2023, a 3.3 mb/d increase over June production of 28.7 mb/d, according to secondary source estimates cited by OPEC in its monthly report. The 10 OPEC members subject to quotas missed their June production target by 1.1 mb/d, and the gap was even wider for OPEC+ as a whole, which was 2.7 mb/d short of the collective target, a small portion of which was due to maintenance shutdowns.

Under the current supply management agreement that was put in place in July 2021, OPEC+ gave itself a buffer to the end of the year to tweak production up or down if required. But Saudi Arabia has made it clear that it will not be swayed by politics. As Jubeir, a former Saudi ambassador to Washington, put it: “Oil is not a political weapon, oil is not a tank.”