Two months ago, the International Energy Agency sounded the alarm over global crude oil supplies, predicting that Western sanctions on Russia would take up to 3 million barrels a day off the market oil world. Now he has changed his mind. In his last Oil Market Monthly Report, the IEA said slowing demand growth and increased production from other major oil economies will help soften the effect of the sanctions. In other words, he no longer expects the market to go into deficit.
“Russia closed nearly 1 mb/d in April, knocking global oil supply down from 710 kb/d to 98.1 mb/d,” the IEA writes in the latest monthly edition of its report. “Over time, steadily increasing volumes from OPEC+ from the Middle East and the United States, along with a slowdown in demand growth, should help address an acute supply shortfall in a context of worsening Russian supply disruption. Excluding Russia, production in the rest of the world is expected to increase by 3.1 mb/d from May to December.”
Here, one has to wonder how steadily Middle Eastern OPEC+ member volumes are increasing to get the real picture. The answer would be that they are indeed steadily increasing among members who have the capacity to do so. Saudi Arabia and the United Arab Emirates come to mind first as the only ones with significant spare capacity, but both have made it clear that they are in no rush to help offset the losses of Russian barrels.
In fact, the UAE oil minister mentioned this week, the global oil market was in equilibrium and excessive price volatility was due to “some not wanting to buy certain crudes and it takes time for traders to move from one market to another.”
“The idea of trying to boycott certain roughs is going to be risky regardless of the motives behind it,” Suhail Al-Mazrouei also said.
The slowdown in demand will certainly contribute to mitigating the effects of this boycott, as the IEA points out in its report. According to the agency, global crude demand growth is expected to slow to 1.9 million bpd in the current quarter from 4.4 million in the first quarter of the year due to inflationary pressures and, of course, , rising oil prices. In the second half, this growth rate is seen by the IEA to drop sharply to just 490,000 bpd.
If that happened, such a slowdown would be a great help in offsetting any loss of Russian production. But that would likely hinge on the lockdowns in China, which are cited by analysts as the main reason for oil demand growth revisions right now.
As for the rise in oil production in the United States, it has encountered problems, according to the latest weekly oil report from the Energy Information Administration. report. In addition to the large drillers’ cautious approach to production growth, rising input prices are now interfering with production growth plans, with U.S. oil production down 100,000 bpd last year. last week at 11.8 million bpd.
This figure supports the EIA’s earlier forecast for production trends this year and next, which are now considered weaker in terms of growth than expected due to inflation in raw materials and equipment, in part due to shortages of everything from workers to fracking.
Brazil, another major global producer, meanwhile said it would not be able to increase production quickly enough to fill the void left by sanctioned Russian barrels. Reuters reported earlier this week that U.S. officials had held talks with Brazil’s Petrobras with a focus on increasing production to compensate for the loss of Russian crude.
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However, they left empty-handed, with Brazilian company officials explaining to their guests that oil production was the result of a longer-term business strategy, not diplomacy, and that a short-term increase term of production would not be possible from a logistics point of view.
In this production context, the only hope for market equilibrium lies on the demand side. Current forecasts call for an acceleration in inflation which should dampen demand for crude, with the International Monetary Fund revising its forecast for economic growth sharply downwards for this year and next.
“Inflation has become a clear and present danger for many countries,” the IMF wrote in an April update. “Even before the war, inflation surged due to soaring commodity prices and supply-demand imbalances. War-related disruptions amplify these pressures. We now expect inflation to remain high for much longer.”
It looks like inflation might be the only thing to temper oil prices as production growth is nowhere proceeding as expected, with many OPEC members struggling with their quotas, ultimately delaying when combined OPEC production would return to its pre-pandemic level. levels.
Russian production, meanwhile, is stabilizing, according to Deputy Prime Minister and former top energy official Alexander Novak. After slipping to 10.05 million bpd in April, production was up 2%, Novak said earlier this week. That would be one more bearish factor for oil, along with the demand projections from the IEA and other forecasters.
By Irina Slav for Oilprice.com
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