We often forget that forecasts are just that: they’re predictions based on conditions that are subject to change. The IEA’s latest monthly projections provide a timely reminder of this simple reality. Back in March, during the early days of Russia’s invasion of Ukraine, the IEA warned that in April 3 mbpd of Russian oil could be shut in. In its latest projections, released yesterday, the agency said that “only” 1 mbpd of Russian oil was offline last month. It now expects a further loss of 600,000 bpd this month – taking the overall decline since February to around 1.6 mbpd. This could stretch to more than 2 mbpd in June and deepen to close to 3 mbpd from July onwards if EU sanctions get the green light.
Staying on the topic of revisions, the IEA also readjusted its outlook for global oil demand this year, albeit to a far lesser extent. Global oil demand growth this year is now seen at 1.8 mpbd, 70,000 bpd less than last month’s estimate. Global demand is forecast to average 99.35 mbpd in 2022. Most of this year’s expected growth took place in 1Q22 and is forecast to slow for the remainder of the year. World oil demand growth is forecast to ease to 1.9 mbpd in 2Q22 from 4.4 mbpd in 1Q22 and is now projected to cool to 490,000 bpd on average in the second half of the year.
OPEC, which also released its monthly report yesterday, agreed with the western countries’ agency. The oil cartel trimmed its oil demand growth forecast for this year by an even bigger 310,000 bpd to 3.37 mbpd. Just as with the IEA, this revision was the result of a downgrade to the 2Q-4Q period. Underpinning this loss of momentum during the rest of 2022 are expectations for persistently high oil prices and the slowing global economic recovery. And given the downside risks facing the world economy, both agencies cautioned that the oil demand outlook is vulnerable to a more pessimistic prognosis going forward.
Returning to the supply front, OPEC production continued to fall short of promises in April. Total output rose by 153,000 bpd last month to 28.65 mbpd, according to OPEC-surveyed secondary sources. Gains that were led by Saudi Arabia, Iraq and the UAE helped offset fresh outages in Libya. Even so, this modest rise fell short of the 254,000-bpd increase specified by the group’s supply cut pact. When taken together with Russian production losses, the shortfall between OPEC+ supply versus official output targets widened to around 2.7 mbpd compared to 1.3 mbpd in March, says the IEA.
And this gaping shortfall will inevitably increase as Russian output suffers further decline and several OPEC members continue in their struggle to pump more crude. Nevertheless, implied balances from the IEA suggest an oil squeeze is not looming. This is because global oil supply is rising and will continue to trend higher for the foreseeable future. OPEC+ members with spare capacity will boost volumes over the coming months as they phase out record cuts enforced in 2020. At the same time, producers outside of OPEC+ led by the US are set to deliver sizable production gains. What’s more, emergency barrels released from IEA members’ strategic stocks are finally making their way to the market. All this is making for a healthy supply backdrop. And that’s without the potential return of Iranian barrels.
Meanwhile, the demand outlook has dimmed due to the China-led slowdown in the global economy. Steadily rising supply coupled with slower demand growth should prevent an acute supply deficit from materialising, even amid the worsening Russian disruption. In other words, the oil market looks more or less balanced in the near-term, contrary to popular belief. That said, this forecast, as with all forecasts, comes with a big dose of uncertainty.
Struggling for direction
The roller-coaster ride shows no sign of stopping. Oil prices yo-yoed yesterday amid a clash of bullish and bearish catalysts. By the close, Brent ended the session little changed while WTI eked out a small gain. In contrast, gasoline prices powered ahead. The front-month RBOB contract has now gained more than 7% in the past two trading sessions thereby underscoring the disconnect between crude and product prices.
At the forefront of the oil market and the broader risk-asset complex for that matter are growing fears of an inflation-driven global recession. No matter where you look, inflation stands out for all the wrong reasons. Yesterday brought with it further evidence that mounting inflationary pressures are rippling through the US economy. The producer price index, which tracks how much manufacturers and services firms charge for their products, rose 0.5% month-on-month in April. Rampant US inflation is fuelling worries about rising interest rates. Indeed, the Federal Reserve has little other option than to maintain an aggressive approach to lifting rates if it hopes to get inflation back under control.
Market sentiment is currently at the mercy of a potentially destructive cocktail of higher inflation, slowing growth, and rising rates. Against this backdrop, haven assets continued to attract strong demand, chief among which was the dollar. The US currency hit a fresh two-decade high on Thursday versus a basket of its major peers. A firmer greenback together with fears of an economic slowdown and further rates tightening will ensure that oil demand concerns remain at the forefront of traders’ thinking.