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The global oil market is “walking a tightrope” between scarce supply and the possibility of a recession, the International Energy Agency (IEA) said on Wednesday, with higher prices and worsening economic conditions already taking a toll on demand.

The cloudy outlook is reflected in volatile trading, with Brent crude falling 7 per cent to below US$100 a barrel on Tuesday as futures traders worried over an economic contraction but high physical oil prices still indicate strong demand for now.

“Rarely has the outlook for oil markets been more uncertain. A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side,” the Paris-based agency said.

“For now, weaker-than-expected oil demand growth in advanced economies and resilient Russian supply” has reduced market tightness, the IEA said in its monthly oil report.

Still, its demand outlook for 2022 was trimmed by just 200,000 barrels per day (bpd) and is set for an annual rise of 1.7 million bpd and 2.1 million bpd in 2023, when it will reach 101.3 million bpd led by growth in developing countries.

The estimate fell far short of producer group OPEC’s estimate for the year of 3.4-million-bpd growth on Tuesday. It was more in line with the U.S. Energy Information Administration’s (EIA) estimate of 2.2-million-bpd growth.

All organizations reduced their outlooks after Russia’s invasion of Ukraine, citing the impact of higher prices and sanctions on economic growth, but the EIA and IEA did so more swiftly and sharply than OPEC.

OPEC producers Saudi Arabia and the UAE will have a limited ability to pump more oil, the IEA warned, with their combined spare production capacity set to fall to 2.2 million bpd in August.

Meanwhile, despite Russian oil exports hitting their lowest levels since last August, the IEA said Russia’s export revenue increased by US$700-million month on month on higher oil prices.

Noting that the profits, which were 40 per cent above last year’s average, supported Russia’s military operations in Ukraine, the IEA called the situation “untenable.”

“Discussions are ongoing to identify a solid market mechanism to ensure effective implementation and enforcement” of a cap on the Russian oil price, it said.

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