IEA Lowers Oil Demand Growth, Expects Market Balance
Oil markets struggling to navigate supply losses and dislocations stemming from Russia’s invasion of Ukraine received much needed support from US and IEA coordinated stock releases. IEA member countries agreed on 1 April to tap their emergency reserves for the second time in the space of a month, this time to the tune of 120 mb. The record volumes will provide welcome relief to an already tight oil market that’s facing heightened uncertainty amid the multitude of repercussions stemming from sanctions and embargoes targeted at Russia by the international community and consumer boycotts. Crude prices have eased by nearly $10/bbl following announcements of the US and IEA stock releases, with ICE Brent last trading at around $104/bbl.
Insisting that no supply shortage exists, OPEC+ countries agreed on 31 March to stick with a modest monthly output increment for May. In March, output from the alliance’s 19 members with quotas was up by a mere 40 kb/d, far below the planned 400 kb/d increase, and 1.5 mb/d below their target. Output from non-OPEC+ producers, most notably the US, also fell short of expectations at the start of the year. Non-OPEC+ output is now seen growing by 2 mb/d in 2022, 100 kb/d lower than in last month’s Report. From this month, our OPEC+ supply estimates will be published on our website.
Russian oil supply and exports continue to fall. So far in April, roughly 700 kb/d of production has reportedly been shut in. We assume these losses will grow to an average 1.5 mb/d for the month as Russian refiners extend run cuts, more buyers shun barrels and Russian storage fills up. From May onwards, close to 3 mb/d of Russian production could be offline due to international sanctions and as the impact of a widening customer-driven embargo comes into full force.
While some buyers, most notably in Asia, increased purchases of sharply discounted Russian barrels, traditional customers are cutting back. For now, there are no signs of increased volumes going to China, where refiners have cut runs as a recent surge in Covid cases and new restrictions have dented oil demand.
The stringent lockdowns in China have led us to further revise down our estimate for oil demand in 2Q22 and for the year as a whole. In addition, more complete demand data for 1Q22, especially in the US, was sharply lower than preliminary estimates. As a result, global oil demand has been reduced by 260 kb/d for 2022 and is now forecast to average 99.4 mb/d, up by 1.9 mb/d from 2021.
Lower demand expectations and steady output increases from Middle East OPEC+ members along with the US and other countries outside the OPEC+ alliance should bring the market back to balance. But the outlook is mired in uncertainty and OECD industry stocks in February continued to draw at a steep pace to stand 320 mb below their five-year average. The IEA’s latest stock release thus provides a crucial buffer to oil markets and much needed relief to consuming countries.