As painful as it is to acknowledge, the aggressor is seemingly winning the economic battle that is the direct consequence of its invasion of Ukraine; its negative impact is much more tangible in the West than in Russia. International sanctions have cut into the country’s oil production and exports but because of this boycott and the resultant oil price rally the country’s oil income has increased, the IEA estimates. Despite falling product sales Russia recorded a rise of $1.7 billion in oil export revenues in May from the previous months. At the same time, and because of rising commodity prices the entrenched inflationary pressure forces central banks to act at the expense of growth all over the world.

It is the rise in consumer prices that left the Federal Reserve with no alternative but to hike its benchmark interest rate by 0.75% adding that another rise of the same magnitude is plausible at its next meeting in its desperate attempt to bring down inflation that is at a 40-year high. It is a divergence from the previous forward guidance of consecutive 0.5% but last week’s CPI data that showed an 8.6% rise in consumer prices have quickly re-written this carefully orchestrated script. Expectations of the 0.75% hike increased in the second half of last week and probably this is why US equities produced a relief rally following last night’s Fed announcement. The economic outlook, however, is far from optimistic and growth will inevitably be hindered by the continuous increases in borrowing costs.

The gut reaction of the oil market was a sell-off, however, the jump in the benchmark rate is unlikely to have an immediate impact on the oil balance – after all supply issues have been driving prices of late. This is why the US administration does everything in its power to ease the imbalance. As part of the medium-term scheme of releasing 180 million bbls of oil from strategic OECD stocks the US SPR saw an outflow of an unprecedented 7.7 million bbls last week, the EIA reports, hence the 2 million bbls build in commercial crude oil stocks. Gasoline stocks fell 700,000 bbls and distillate inventories increased roughly by the same margin. Gasoline and distillate demand held steady. It was, however, the Fed’s action that was in the centre of attention and consequently oil ended the day lower with the exception of Heating Oil and Gasoil. These two contracts rallied hard due to refinery problems both in the US Gulf Coast and in Europe. Because of the ongoing supply issues the current weakness is expected to be temporary and the de-coupling between equities and oil ought to continue through the summer.

Some relief in 2H, tight 2023

The definition of turbulence is irregular atmospheric motion especially when characterized by up-and-down currents. What a fitting description of the present state of the oil market. Demand headwinds clash with supply tailwinds and depending on the ever-changing strength of these opposing forces oil prices fell or rise, rather violently at times. This choppiness has been tangible in the latest round of monthly supply-demand data and yesterday’s release of the IEA’s finding did nothing to make the blurred picture clearer.

The message the energy watchdog of the western world sends out is not as downbeat as the EIA projection for the latter part of the year, but it is in sharp contrast with the OPEC estimates. There has been a notable downward revision on the call on OPEC for 2H 2022, more significant for 3Q (-1.8 mbpd) than for 4Q (-700,000 bpd). This considerable amendment is, to a lesser extent, the result of struggling demand growth. The absolute figure is now seen at 100.1 mbpd, 100,000 bpd less than last month and the cut is the combination of higher oil prices and struggling economic expansion as embodied in the latest World Bank and OECD reports. Slowing oil demand growth is absolutely justifiable in the current economic climate and considering that oil consumption is still expected to be below the pre-pandemic level in 2022, albeit growing by 1.8 mbpd year-on-year, no price support is seen forthcoming from this side of the oil equation.

Which shifts attention towards supply. The backdrop has gotten gloomier here, too, according to the IEA as the agency increases its non-OPEC supply forecast for the second half of this year by 1.15 mbpd. One possible reason for the upward revision is the co-ordinated release of 1 mbpd of strategic oil between April and October this year. Non-OPEC+ will be the major driving force behind the increase in global supply.

The loosening of the oil balance will see demand for OPEC oil decline in 2H. It is now predicted to stand at 28.90 mbpd, a hefty cut of 1.25 mbpd from the previous month. This massive and unusual amendment is yet another example of the difficulties forecasters face in these uncertain times. Despite struggling OPEC production global and OECD oil inventories are set to rise – after all the producer group, despite continuously pumping significantly below its allowance, should be able to match and even exceed the demand for its oil in coming months. This is why the IEA sees gradual increase in OECD inventories through the year end after seven consecutive quarterly drawdowns. On a side note, it must be pointed out that the IEA’s OPEC call of 28.90 mbpd for 2H is 1.1 mbpd lower than OPEC’s own estimate – a pertinent lack of consensus.

The current strength, both outright prices and crack spreads has partially been the function of restricted refinery capacity, something that ought to change soon. As refiners are coming out of maintenance globally runs should increase. Global refinery throughput, which is estimated at 78.8 mbpd in 2Q could rise to 81.4 mpbd in 3Q and 81.2 mbpd in 4Q. This will alleviate the current acute product shortage, although the IEA warns that the uneven rates of demand growth could lead to persistent scarcity of individual products, especially distillates.

Even if the post-summer period will bring declining consumption, increasing supply and gradually rising oil inventories, this relief is set to be a temporary phenomenon. In 2023 global oil demand is forecast to grow by 2.1 mbpd with non-OPEC supply expanding by a meagre 300,000 bpd. The market should tighten again, mainly because Russian sanctions should bite harder than this year. The oil balance will ostensibly tip into deficit again, the IEA predicts.