Crude demand growth to slow on mounting economic woes – IEA

Crude oil demand growth in Q4 and next year will be weaker than previously expected as the global economy slows, the International Energy Agency (IEA) said.

The IEA now expects crude demand growth to be 240,000 bbl/day lower in Q4 than it had previously anticipated.

However, for 2022 as a whole, the IEA has upped its demand growth forecast to 2.1m bbl/day, 180,000 bbl/day higher than its previous forecast, on the back of a recovery in the Chinese economy after lockdowns.

In 2023, crude oil demand growth is expected to stand at 1.6m bbl/day, 40,000 bbl/day lower than previously expected.

Next year, growth will be heavily supported by the petrochemicals and liquefied petroleum gas (LPG) sectors, but diesel and gasoil growth is expected to ease “under the weight of persistently high prices”, a slowing economy, and despite increased gas-to-oil switching, said the IEA.

“Oil’s global demand outlook continues to face a myriad of headwinds in the shape of rising recession odds, China’s persistently weak economy, Europe’s energy crisis, soaring product crack values and a strong US dollar,” it said.

“Combined, these have weighed on deliveries for most of 2022 and will continue to do so for the foreseeable future… Economic indicators remain unremittingly weak amid fears that hawkish central bank policies to combat soaring inflation may push the global economy into recession.”

Crude oil producing cartel OPEC this week also downgraded its demand growth forecast for 2022 and 2023 on the back economic woes.

DIESEL SHORTAGE
In its Oil Market Report, the IEA focused its attention on the global diesel market which has been tight and could get even tighter as deliveries from Russia decrease when the EU implements its crude oil products embargo from February.

It said diesel prices and cracks – the differential to the crude oil price – surged to record highs in October, and now stand 70% and 425% higher, respectively, than a year ago.

The international crude reference Brent has increased 11% during the same period.

“Distillate inventories are at multi-decade lows. French refinery strikes last month, and upcoming embargoes propelled diesel prices in Rotterdam, Europe’s main trading hub, to more than $80/bbl above North Sea Dated at one point, before easing somewhat,” said the IEA.
“Diesel premiums in the US have also soared ahead of the winter heating season in the Northeast. High diesel prices are fuelling inflation, adding pressure on the global economy and world oil demand.”

The IEA said the diesel market was already in deficit before Russia’s invasion of Ukraine due to the closure of 3.5m bbl/day refinery distillation capacity since the start of the pandemic. This has resulted in a net decline of 1m bbl/day.

RUSSIAN EMBARGO
By October, EU countries had reduced Russian crude oil imports by 1.1m bb/day to 1.4m bbl/day, and diesel flows by 50,000 bbl/day to 560,000 bbl/day.

“When the crude and product embargoes come into full force in December and February, respectively, an additional 1.1m bbl/day of crude and 1m bbl/day of diesel, naphtha and fuel oil will have to be replaced,” said the IEA.

“For crude oil, no significant buying from Russia outside China, India, and Turkey has appeared despite massive discounts. A further rerouting of trade should help ease pressures, but a shortage of tankers is a major concern, especially for ice-class vessels required to load out of Baltic ports during winter.”

Once the EU implements its embargo, the competition for non-Russian diesel barrels “will be fierce”, said the IEA, with the 27 countries in the EU having to bid for cargoes from the US, the Middle East and India away from their traditional buyers.

“Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear,” it concluded.
Source: ICIS by Jonathan Lopez, https://www.icis.com/explore/resources/news/2022/11/15/10825739/crude-demand-growth-to-slow-on-mounting-economic-woes-iea/