IEA cuts oil demand growth, expects market equilibrium

Oil markets struggling to cope with supply losses and disruption resulting from Russia’s invasion of Ukraine have received much-needed support from the United States and the IEA coordinated stock releases. IEA member countries agreed on April 1 to tap their emergency reserves for the second time in the space of a month, this time to the tune of 120mb. The record volumes will bring welcome relief to an already tight oil market that faces heightened uncertainty amid the myriad of repercussions stemming from sanctions and embargoes targeted against Russia by the international community and consumer boycotts. Crude prices eased nearly $10/bbl following the news of the US equities and IEA release, with ICE Brent last trading at around $104/bbl.

Insisting that there is no shortage of supply, OPEC+ countries agreed on March 31 to stick to a modest increase in monthly production for May. In March, the production of the 19 members of the alliance with quotas increased by only 40 kb/d, well below the planned increase of 400 kb/d and 1.5 mb/d below their objective. Production from non-OPEC+ producers, notably the United States, also fell short of expectations at the start of the year. Non-OPEC+ production is now expected to increase by 2mb/d in 2022, 100kb/d less than in last month’s report. Starting this month, our OPEC+ supply estimates will be published on our website.

Russian oil supply and exports continue to fall. So far in April, about 700 kb/d of production would have been shut down. We assume these losses will average 1.5mb/d for the month as Russian refiners extend production cuts, more buyers shun barrels and Russian storage fills up. . From May, nearly 3 mb/d of Russian production could be offline due to international sanctions and the coming into force of the impact of a growing customer-focused embargo.

While some buyers, particularly in Asia, have increased their purchases of heavily discounted Russian barrels, traditional customers are reducing their purchases. For now, there are no signs of increased volumes to China, where refiners have cut cycles as a recent rise in Covid cases and new restrictions have weighed on demand for oil.

The strict containment measures in China have led us to revise downwards our estimate of oil demand in 2Q22 and for the whole year. Additionally, more comprehensive demand data for 1Q22, particularly in the US, was significantly lower than preliminary estimates. As a result, global oil demand has been reduced by 260 kb/d for 2022 and is now expected to average 99.4 mb/d, up 1.9 mb/d from 2021.

Falling demand expectations and steadily increasing production from OPEC+ members in the Middle East as well as the United States and other countries outside the OPEC+ alliance are expected to bring the market back to normal. balance. But the outlook is mired in uncertainty and OECD industrial stocks in February continued to decline at a healthy pace to sit 320mb below their five-year average. The latest stock release from the IEA thus provides a crucial buffer to oil markets and much-needed relief to consuming countries.
Source: IEA

Steve R. Hansen