June 23, 2022

WWW.ENERGYINTEL.COM

Benchmarking: Specter of Recession Confounds Demand Outlook

  • The consensus forecast for demand growth in 2022 is increasingly bearish as analysts vie with the risks posed by high fuel prices, record inflation, tighter monetary policy and the threat of a recession.
  • The Russia factor has muddled the supply picture for 2022-23, although agencies surveyed have readjusted the outlook upward based on Russia’s ability to find new markets for its barrels.
  • The overall global balance this year has swung into surplus, according to consensus, as new supply outstrips weaker-than-expected demand.

Oil demand is set to grow by 2.4 million barrels per day in 2022, according to the average among consensus, which is down from 3.6 million b/d forecast at the start of the year. High prices for fuels and food are eroding growth prospects, and further downward revisions are possible given the high degree of uncertainty.

On the supply side, Russia’s precipitous output decline in April now resembles a one-off as the country finds alternative buyers for its crude — to be sure, at a $40 per barrel discount to dated Brent — and ramps up production. This puts the global market more in balance for the remainder of the year and could even result in a small inventory build, consensus now shows.

Shrinking Demand Growth

Demand is seen growing in a range of 1.8 million-3.4 million b/d among the four agencies surveyed. Energy Intelligence is at the lower end of the range: we now see demand rising 1.9 million b/d, down from 2.2 million b/d in May as “high fuel prices and souring broader market sentiment … take their toll,” as our recent Oil Market Intelligence states. Our demand forecasts have adjusted downward for four months straight.

Slightly lower is the International Energy Agency (IEA), which is forecasting that consumption will grow 1.8 million b/d, roughly flat on last month’s estimate. Still, summer travel will boost demand by 3.6 million b/d from April to August, the IEA pointed out in its June Oil Market Report. Crucially, however, the IEA has revised down second-half 2022 demand by 100,000 b/d to 100.1 million b/d while adjusting upward first-quarter demand by 500,000 b/d to 99.3 million b/d.

The US Energy Information Administration (EIA) and Opec largely kept their demand outlooks for 2022 flat. Still, their growth forecasts are higher. The EIA sees annual growth of 2.3 million b/d to 99.3 million b/d, while Opec remains the most optimistic, estimating that hydrocarbon liquids consumption will rise by 3.4 million b/d this year to 100.3 million b/d.

Created with Highcharts 9.0.0(million b/d)DEMAND GROWTH FORECASTS, 2022Energy IntelligenceIEAOpecEIASep '21Nov '21Jan '22Mar '22May '22Jul '22Sep '22Nov '2212345Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO

Created with Highcharts 9.0.0(million b/d)DEMAND FORECASTS, 2022Energy IntelligenceIEAOpecEIAJun'22May'22Apr'22Mar'229698100102Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO Mar'22 Energy Intelligence: 100.6

Russian Rebound

After the 950,000 b/d drop in crude and condensate production in April to 10.1 million b/d, Russia is crawling back. Output in the first half of June was 10.7 million b/d, and further upside cannot be ruled out as China and India happily snap up the discounted barrels.

This unprecedented zigzag in output has confounded supply forecasts. The IEA now forecasts Russian crude output at 9.1 million b/d this year, which denotes a 500,000 b/d increase on 2021. In 2023, however, Russia will produce only 7.5 million b/d, the agency said, which reflects anticipated sanctions.

The EIA is forecasting Russian liquids production this year to average 10.4 million b/d, down 360,000 b/d year on year, while next year’s output will comprise 9.5 million b/d. Opec, on the other hand, believes Russian liquids output will decline only 200,000 b/d this year to 10.6 million b/d.

Energy Intelligence has also revised its outlook for Russia, and we now expect crude output to average 9.5 million b/d this year, down 140,000 b/d on 2021, and 8.2 million b/d in 2023. By the fourth quarter of next year, Russia’s production will decline to 7.9 million b/d, according to our forecast.

As a result of lower Russian output, as well as persistent troubles in Libya and overall malaise among many alliance producers, Opec-plus could see a decline in output in 2023. Our forecast shows a fall of 330,000 b/d to 43.5 million b/d for the 23-member alliance. Similarly, the IEA forecasts Opec-plus crude output sinking 600,000 b/d next year to 43.1 million b/d.

Opec does not estimate the alliance’s production, nor has it rolled out forecasts for 2023. The EIA, for its part, does not separate Opec-plus’ production in its balance.

Created with Highcharts 9.0.0(million b/d)NON-OPEC SUPPLY FORECASTS, 2022Energy IntelligenceIEAOpecEIASep '21Nov '21Jan '22Mar '22May '22Jul '22Sep '22Nov '226465666768Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO

Shift to Surplus

At the start of the year, the global market was poised to finish the year with a net draw on inventories. The demand outlook was stellar, and oil output was not expected to maintain pace.

Now that there has been a paradigm shift in geopolitics, oil prices have touched a 14-year high and China is still beset by lockdowns, the narrative is changing to one of demand erosion.

Consensus now sees a net build of inventories this year. The IEA’s balance shows supply outweighing demand by 400,000 b/d on average — the result of readjusting Russian barrels upward — as opposed to a net draw of 140,000 b/d forecasted last month.

The EIA has been forecasting a net build for several months now and its latest report highlights a net 450,000 b/d surplus for 2022.

Energy Intelligence’s balance was largely flat last month, but our June numbers show a net surplus of 300,000 b/d this year.

Opec compiles its balance differently and instead indicates a call on its oil together with changes in inventories. But using Energy Intelligence's forecast for Opec members' output, the organization's balance suggests a 400,000 b/d draw this year, which sets it apart from consensus.

Created with Highcharts 9.0.0(million b/d)LATEST GLOBAL SURPLUS/DEFICIT ESTIMATESEnergy IntelligenceIEA*Opec†EIAQ1'21Q2'21Q3'21Q4'21Q1'22Q2'22Q3'22Q4'22-4-3-2-1012NOTE: *Reflects latest Opec-plus deal and member countries' sustainable capacity. †Assumes Energy Intelligence Opec production forecast. Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO

Gary Peach, New York