IEA: Lower demand changes everything for oil markets

Two months ago, the International Energy Agency sounded an alarm over the world’s supply of crude oil, predicting that Western sanctions on Russia would remove up to 3 million barrels a day from the global oil market. Now, he has changed his mind. in his last Oil Market Monthly ReportThe IEA said slowing demand growth and rising output from other major oil economies will help weather the effect of sanctions. In other words, you no longer expect the market to go into deficit.

“Russia closed at almost 1 mb/d in April, reducing global oil supply by 710 kb/d to 98.1 mb/d,” the IEA wrote in the latest monthly edition of its report. “Over time, the steady increase in OPEC+ volumes from the Middle East and the US are expected to increase by 3.1 mb/d from May to December.”

Here, one must wonder how steadily Middle Eastern OPEC+ member volumes are increasing to get a true picture. The answer would be that they are, in fact, steadily increasing among members who have the ability to do so. Saudi Arabia and the United Arab Emirates come to mind first as the only ones with sizable spare capacity, but both have made it clear they are in no rush to help offset the loss of Russian barrels.

In fact, the UAE Oil Minister saying this week the world oil market was in balance and the excessive price volatility was due to the fact that “some do not want to buy certain crudes and it takes time for traders to move from one market to another.”

“The idea of ​​trying to boycott certain crude oil will be risky, regardless of the motives behind it,” Suhail Al-Mazrouei also said.

The slowdown in demand will undoubtedly help to weather the effects of this boycott, as the IEA points out in its report. According to the agency, global crude demand growth is expected to slow to 1.9 million bpd during the current quarter from 4.4 million in the first quarter of the year due to inflationary pressures and, of course, to higher oil prices. In the second half of the year, the IEA sees this growth rate falling sharply to just 490,000 bpd.

If that happens, such a slowdown would go a long way to offset any lost Russian production. But that would likely depend on lockdowns in China, which analysts cite as the main reason for revisions to oil demand growth right now.

As for rising oil production in the United States, that has struggled, according to the Energy Information Administration’s latest weekly oil statement. report. In addition to the major drillers’ cautious approach to production growth, higher input prices are now interfering with plans for production growth, as US oil production fell by 100,000 bpd the last week at 11.8 million bpd.

The figure supports the EIA’s previous forecast for production trends this year and next, which now looks lower in terms of growth than expected due to inflation of raw materials and equipment, partly driven by shortages. everything from workers to frac sand.

Meanwhile, Brazil, another major world producer, has declared that it will not be able to ramp up production fast enough to fill any gap left by sanctioned Russian barrels. Reuters reported earlier this week that US officials had held talks with Brazil’s Petrobras with the aim of boosting production to offset the loss of Russian crude.

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However, they left empty-handed, with Brazilian company officials explaining to their guests that oil production was the result of a longer-term business strategy, not diplomacy, and that an increase in production in the short term it would not be possible from a logistical point of view. Point of view.

In this productive context, the only hope for market equilibrium is on the demand side. Currently, forecasts point to an acceleration in inflation that should moderate the demand for crude oil, and the International Monetary Fund has revised downwards its forecasts for economic growth for this year and next.

“Inflation has become a clear and present danger for many countries,” the IMF wrote in an April update. “Even before the war, it rose due to rising commodity prices and supply-demand imbalances. War-related disruptions amplify those pressures. We now project inflation to remain elevated for much longer.” .

It looks like inflation might be the only thing moderating oil prices as production growth is not going according to expectations anywhere, with many OPEC members struggling with their quotas, ultimately delaying the time when OPEC’s combined production would return to pre-pandemic. levels

Meanwhile, Russian production is stabilizing, according the Deputy Prime Minister and former energy leader, Alexander Novak. After falling to 10.05 million bpd in April, output rose 2 percent, Novak said earlier this week. That would be one more bearish factor for oil, along with demand projections from the IEA and other forecasters.

By Irina Slav for Oilprice.com

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