Oil bodies downgrade demand expectations as lockdowns and inflation bite
Leading oil bodies have downgraded expectations for crude demand this year, amid continued volatility in the market.
OPEC has cut its forecasts for growth in world oil demand this year for a second straight month, citing the impact of spiralling inflation, lockdowns in China and Russia’s invasion of Ukraine.
In its monthly report, published yesterday, the cartel revealed world demand would rise by 3.36m barrels per day in 2022, down 310,000 barrels per day from its previous forecast.
OPEC said: “Demand in 2022 is expected to be impacted by ongoing geopolitical developments in Eastern Europe, as well as COVID-19 pandemic restrictions.”
Russia’s invasion of Ukraine, and subsequent announcements of energy sanctions from the US and UK on Russian supplies, saw prices climb to a 14-year peak of $139 per barrel in March.
Prices have since cooled with the US and International Energy Agency (IEA) pledging to flood global markets with 240m barrels, but both major benchmarks remain elevated above the $100 milestone – which it failed to reach for the previous eight years.
The group still expects world consumption to surpass the 100m barrel per day in the third quarter, and for the 2022 annual average to just exceed the pre-pandemic 2019 rate.
Markets remain generally tight, with OPEC+ only gradually unwinding record output cuts put in place during the worst of the pandemic in 2020.
The group, which consists of OPEC and allies including Russia, has backed modest increases in output, rebuffing Western pressure to raise production levels at a faster pace to meet consumption demand.
At its last meeting, OPEC+ swerved the Ukraine crisis and stuck to a previously agreed plan to boost its monthly output target by 432,000 bpd in June.
However, the group has persistently been undershooting the increases due to underinvestment in oilfields from some OPEC members and, more recently, losses in Russian output as a result of sanctions and buyer avoidance.
The report showed OPEC output in April rose by 153,000 barrels per day to 28.65m , well behind the 254,000 rise that OPEC is agreed under the OPEC+ deal.
The growth forecast for non-OPEC supply in 2022 was reduced by 300,000 bpd to 2.4 million bpd.
IEA U-turns on forecasts of global supply shock
Despite shortening supplies, the IEA has U-turned from its forecasts in March of a global supply shock this year.
It warned previously that three million barrels per day could be shut out of market from April following sanctions on Russia.
Russian exports rebounded in April by 620,000 barrels per day from the month before to 8.1m barrels per day, back to January-February average as supply was rerouted away from the United States and Europe, primarily to India.
However, only one million barrels went offline last month.
The IEA sees that figure rising to 1.6m bpd in May, to two million in June and to nearly three million from July onwards if sanctions deter further buying or expand.
It further argues that China’s lockdowns will significantly reduce demand growth, forestalling its previously estimated big deficit.
In its monthly oil report, published earlier this week, the IEA said: “Over time, steadily rising volumes from Middle East OPEC+ and the U.S. along with a slowdown in demand growth is expected to fend of an acute supply deficit amid a worsening Russian supply disruption.”
The European Union is weighing up a ban on Russian oil, and currently the top market for Russian oil exports last month.
Efforts to reduce its reliance in the short-term have only been partially successful, with its dependence cut by just 535,000 barrels per day from the start of the year.
The bloc now accounts for 43 per cent of Russian oil exports, down from around 50 per cent last December.