Benchmarking: War, Frothy Prices, Covid-19 Take Toll on Demand

Brent averaged $117 in March, up from $65 during the same month last year. This 80% annual surge, along with soaring food prices, is forcing consumers to curtail consumption and policymakers to adopt a variety of measures to mitigate the pain. In two months, global oil markets have changed dramatically, and there is agreement that more unexpected twists lie ahead. For now, volatility is the common denominator.

Demand Recoils

Prior to the war, demand growth this year among the four agencies surveyed averaged 3.6 million barrels per day. After two months of war and $100+ Brent, this has now dropped to 2.6 million b/d.

In the agencies’ April reports, the more dramatic revision came from the US Energy Information Administration (EIA), which slashed demand growth this year by 800,000 b/d to 2.4 million b/d based on downward adjustments to global GDP. Demand will average 99.8 million b/d this year, the EIA said.

The most conservative adjustment in April belonged to the International Energy Agency (IEA). The Paris-based organization reduced demand growth this year by a mere 260,000 b/d to 99.4 million b/d. But the IEA had already cut demand growth by nearly 1 million b/d in March.

Energy Intelligence was in the middle of consensus, trimming consumption growth this year by 500,000 b/d to 2.6 million b/d, with average demand for the year coming in at 100.1 million b/d. Reasons for our revision include the war’s negative impact on global trade and the 373 million Chinese whose movements were restricted after the latest pandemic-related lockdowns.

Based on the latest reports, the International Energy Agency (IEA) is at the low end of the range, forecasting 1.9 million b/d in growth to 99.4 million b/d, while Opec, as expected, is at the high end. Growth in 2022 will be 3.7 million b/d, reaching 100.5 million b/d, according to the Vienna-based producers organization.

Sanctions Reshape Supply

The supply picture is also warped now that many countries and traders are eschewing Russian barrels.

Russian production largely held steady in March but began falling precipitously in April. This is expected to carry over into May, after which the outlook becomes murkier. Three of the four agencies surveyed are forecasting significant declines in Russian output in 2022, with Opec cutting against the grain and calling for a rise in liquids production.

At the extreme end is the IEA: the agency forecasts that Russian liquids output will plummet 1.4 million b/d to 9.4 million b/d this year. Crude production alone will tank nearly 1.6 million b/d to 8 million b/d, according to the IEA’s latest report.

The EIA, by contrast, sees Russia’s liquids production dipping 350,000 b/d this year to 10.43 million b/d.

Energy Intelligence’s forecast represents the middle ground between the former two. We believe liquids output by Russia will drop by 730,000 b/d to 10.39 million b/d. Out of that, crude oil production will decline by 690,000 b/d to 8.9 million b/d.

Standing apart from the pack is Opec, which estimates that total liquids output from Russia will increase 430,000 b/d this year to 11.23 million b/d. This is down from a previous growth estimate of 960,000 b/d for the year.

The contrasting revisions to Russia’s outlook is reflected in forecasts for non-Opec supply in 2022. At the low end, the IEA sees these supplies growing only 760,000 b/d to 64.5 million b/d, while on the high end, Opec forecasts a 2.7 million b/d gain, to 63.7 million b/d, from this large group of producers.

Energy Intelligence is again in the middle of consensus, forecasting non-Opec liquids output growth this year of 1.6 million b/d to 65.4 million b/d (see graph).

Contrasting Balances

The combination of stultified demand growth and crippled Russian production has had curious effects on the outlook for global balances this year.

Energy Intelligence sees the largest supply deficit this year. To be sure, the first half of 2022 will yield a 200,000 b/d surplus, then the second half will flip into deficit, with the markets needing to draw nearly 900,000 b/d to stay in balance. Thus on net for the year, we are now forecasting a net draw of 350,000 b/d from inventories. Further expected downward revisions to oil demand growth are expected to bring the market into balance.

On the opposite end is the EIA, which is forecasting three straight quarters of surplus in 2022. On average, global markets will experience a 400,000 b/d build in inventories this year.

The IEA and Opec are between these two forecasts. The former, like Energy Intelligence, sees a deficit in the second half of the year, although for the year the net draw from stocks will be just over 100,000 b/d.

Opec does not forecast its own production, but based on Energy Intelligence’s outlook for the group’s producers, markets will tip into deficit in the second half of the year. However, given a 560,000 b/d build in the second quarter, on net there will be a 40,000 b/d build in inventories in 2022.