At the risk of sounding like a broken record, these are troubling times for the global economy. Growth prospects have dimmed of late on the back of persistent inflationary pressures, accelerating financial tightening and rising geopolitical uncertainty. In the past week, the World Bank and OECD cut their forecast for global economic expansion in 2022. Soon after, the IMF said it expects to follow suit when it releases its updated projections next month.

In other words, it’s all doom and gloom for the global economy these days. Yet not so according to OPEC. The oil cartel released its latest forecasts yesterday and in doing so put on an optimistic front in the face of economic challenges. World GDP growth in 2022 remains broadly unchanged at 3.5% from a previous forecast. Meanwhile, against this resilient backdrop, OPEC stuck by its forecast for solid global oil demand growth this year. Consumption is set to expand by 3.37 mbpd in 2022 to average 100.29 mbpd, unchanged from last month’s predictions. Within the quarters, the 2Q22 was revised down, reflecting Chinese lockdowns, while 2H22 was revised up on expectations of higher demand during the summer holiday and driving season.

While OPEC seems unfazed by the downside pressures facing the global economy, its latest estimates did reflect the fallout from the conflict between Russia and Ukraine. The organisation trimmed the outlook for Russia’s liquids production for 2022 by a further 245,000 bpd. This downward adjustment was largely responsible for the softening outlook for non-OPEC producers. The forecast for non-OPEC supply growth in 2022 was revised down by 270,000 bpd to 2.14 mbpd for an absolute figure of 65.74 mbpd.

As for OPEC’s own production, it remains grossly inadequate. According to secondary sources, OPEC crude production averaged 28.51 mbpd in May, lower by 176,000 bpd m-o-m and the biggest drop since February 2021. The major culprit behind this drop was outages in Libya. Removing Libya and the other two exempted members from the equation and OPEC-10 output actually rose last month, albeit only marginally. Those bound by the OPEC+ supply cut pact increased supply by 35,000 bpd to 24.54 mbpd. This is a far cry from the 25.59 mbpd stipulated by the group’s accord and further highlights OPEC’s inability to ramp-up production.

As things stand, OPEC is falling further behind its production quotas. And there is little chance of a respite on the horizon. Demand for the cartel’s crude is set to increase significantly in the second half of this year. OPEC revised up the forecasted call on its crude for both 3Q22 and 4Q22 by around 300,000 bpd. Consequently, the call on OPEC crude is anticipated to average 30 mbpd in 2H22. There is little chance of the group’s output reaching this level in the near term hence the prevailing supply tightness will endure over the coming months. A return to a balanced market only seems likely in the final quarter of this year, if at all. In the meantime, travel chaos, heatwaves and elevated oil prices will be a familiar fixture this summer.

All eyes on the Fed

After a positive start, the two leading crude benchmarks settled in the red yesterday. Upside potential was knocked by, among other things, China’s Covid woes. Authorities in Beijing re-imposed restrictions as cases edged higher and in doing so undermined hopes for a rebound in Chinese oil demand. Meanwhile, adding to the uneasy atmosphere were fresh Fed rate hike tantrums. Market players are bracing for a more hawkish US monetary policy amid further evidence that US inflation is running hot. Producer prices rose by 10.8% year-on-year in May and will likely spur the Federal Reserve to lift US interest rates sharply later today. Indeed, markets are pricing in a 75 bp rate hike. It’s time for the US central bank to “go big or go home” if it is to get a grip on surging inflation. Yet this is fuelling fears that aggressive policy tightening could pave the way for recession-induced demand destruction.

Staying in the US, oil prices were hit by rumours that the government was mulling over a windfall tax on energy companies. Elsewhere, reports of rising Russian oil output also made for less encouraging news to those of a bullish disposition. News agency Interfax reported that Russia’s oil production has risen almost 5% in the first half of June compared to May. This comes on the back of rising flows to Asia, and nowhere more so than India. Russian crude shipments to India rose by more than 600,000 bpd in May from the previous month to an all-time high.

Alongside today’s Fed policy meeting, traders will also be keeping an eye on the latest report concerning US oil inventories. Overnight, API data showed crude and distillate fuel stocks rose by around 740,000 bbls and 230,000 bbls respectively, while gasoline stockpiles fell by 2.2 million bbls. Expect today to be a very US-centric session with plenty of ups and downs.