International Energy Agency: Falling demand changes everything for oil markets

Two months ago, the International Energy Agency sounded the alarm about global crude oil supplies, predicting that Western sanctions on Russia would remove up to 3 million barrels per day from the global oil market. Now, she changed her mind. In its latest release Monthly Oil Market ReportThe International Energy Agency said slowing demand growth and increased production from other major oil economies would help offset the impact of the sanctions. In other words, he can no longer expect the market to swing into deficit.

“Russia shut down nearly 1 million barrels per day in April, reducing global oil supply by 710,000 barrels per day to 98.1 million barrels per day,” the International Energy Agency wrote in its latest monthly edition of its report. “Over time, the steadily increasing volumes of OPEC+ in the Middle East and the United States combined with slowing demand growth are expected to fend off severe supply deficits amid Russian supply disruptions at 3.1 million barrels per day from May through December.”

Here, one only needs to ask about how much volumes are increasing from OPEC members in the Middle East to get the real picture. The answer would be that they are already steadily rising among the members who have the ability to do so. Saudi Arabia and the United Arab Emirates first come to mind as the only two countries with significant spare capacity, but both have made it clear that they are in no hurry to help make up for the loss of Russian barrels.

In fact, the UAE oil minister She said This week the global oil market was in equilibrium, causing excessive volatility in prices because “some people 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 a certain oil would be risky, regardless of the motives behind it,” said Suhail Al Mazrouei.

The slowdown in demand will certainly help to offset the effects of this boycott, the International Energy Agency noted in its report. According to the agency, global demand growth for crude is expected to slow to 1.9 million barrels per day during the current quarter from 4.4 million in the first quarter of the year due to inflationary pressures and, of course, higher oil prices. In the second half of the year, the IEA saw this growth rate drop sharply to just 490,000 barrels per day.

If it did, such a slowdown would be a huge catalyst for offsetting any loss of Russian production. But that will likely depend on China’s lockdowns, which analysts cite as the main reason for oil demand growth revisions right now.

As for rising US oil production, it has run into problems, according to the Energy Information Administration’s latest weekly oil report. Report. In addition to the cautious approach of the big drillers to production growth, higher input prices are now interfering with production growth plans, as US oil production fell by 100,000 barrels per day last week to 11.8 million barrels per day.

The number supports previous EIA expectations about production trends this year and next, which is now seen lower in terms of growth than previously expected due to raw material and equipment inflation, driven in part by a shortage of everything from workers to frac sand.

Meanwhile, Brazil, another major global producer, has announced 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 have held talks with Brazil’s Petrobras with a focus on increasing production to offset the loss of Russian crude.

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However, they were left empty-handed, as Brazilian company officials made it clear to their guests that oil production was the result of a long-term business strategy, not diplomacy, and that a short-term increase in production would not be possible from a logistics point of view.

In this production context, the only hope for equilibrium in the market is on the demand side. For now, expectations are for an acceleration of inflation that should ease demand for crude oil, with the International Monetary Fund revising its economic growth forecasts for a sharp cut for this year and next.

“Inflation has become a clear and present risk for many countries,” the International Monetary Fund wrote in an April update. “Even before the war, it rose on the back of soaring commodity prices and imbalances between supply and demand. The disruptions associated with the war amplify those pressures. We now expect inflation to remain elevated for much longer.”

It appears that inflation could be the only thing dampening oil prices since production growth is not going according to expectations anywhere, with many OPEC members struggling with their quotas, ultimately delaying the moment when joint OPEC production will return to before the pandemic. levels.

In the meantime, Russia’s production is stabilizing, according to to the former deputy prime minister and energy man Alexander Novak. Novak said earlier this week that after falling to 10.05 million barrels per day in April, production increased slightly by 2 percent. This will be another bearish factor for oil, along with the demand outlook from the International Energy Agency and other forecasters.

By Irina Slough for Oilprice.com

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