This week finally saw good news for oil consumers. OPEC and the International Energy Agency lowered their demand forecasts, suggesting that prices finally had significant downside potential. But OPEC is ready to change course. “Tough new lockdown measures amid China’s surge in Covid cases have led to a downward revision to our expectations for global oil demand in 2Q22 and for the year as a whole,” the company wrote. ‘IEA in its last Oil market report this week.
The agency also noted that OECD members were consuming less oil than expected, leading the IEA to revise down its demand outlook for the year by 260,000 bpd from the OMR. last month to a total of 99.4 million bpd.
At the same time, the agency cited stable and large production additions in the first quarter of the year, noting that it was led by non-OPEC producers. Whenever a production increase is led by non-OPEC producers, it’s worth watching OPEC even more closely than usual for its response.
That answer has yet to come, but the cartel itself is also revising its demand outlook for this year downward. And it revises it much more than the IEA.
Global oil demand was expected to be 480,000 bpd lower than expected, OPEC said in the latest edition of its monthly oil market report. the cartel cited slower economic growth due to the war in Ukraine as one reason for the review, and Covid-related lockdowns in China as another.
On the supply side, the IEA seems perfectly calm. After sounding the alarm over the potential loss of 3 million bpd of Russian oil exports due to Western sanctions, the agency has now said that the coordinated release of a total of 240 million barrels of crude , of which 180 million bpd to be released by the United States, would offset the effect of the loss of Russian supplies.
It seems that the IEA assumes that the loss of Russian supply will be temporary, just as the effect of the release of reserves will only last for the time of the release, if not less. And OPEC could still have a nasty surprise in store for IEA members ready to dip into their own strategic reserves to normalize reference prices.
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Earlier this month, OPEC met with representatives of the European Union just to Tell them that he would not intervene if Russian oil exports were completely cut off.
“We could see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions. Given the current outlook for the demand, it would be nearly impossible to replace a volume loss of this magnitude,” said cartel secretary general Mohammed Barkindo.
Yet, with the revised demand forecast, OPEC may well decide to revise its production plans as well. With millions of Russian oil off the (official) chart and a very slim chance of Iranian barrels coming back for now, it’s up to OPEC and the US to fill the void. If, that is to say, they want.
US producers seem to be warming to the idea of increasing production, with prices so high that their profit margins are large enough to motivate more drilling. OPEC, meanwhile, increased production by barely 67,000 bpd last month. Indeed, some OPEC members saw a drop instead of an increase in their oil production, but Saudi Arabia notably exceeded its production quota.
At the same time, OPEC has revised up its US oil production forecast for this year, and history shows that when US oil production increases, OPEC is not a happy cartel and takes action. to counter this growth. Now, with this expectation of production growth coupled with expectations of slower demand growth, OPEC’s response may only be a matter of time.
As to the nature of the potential reaction, it is not difficult to guess. Right now, OPEC is selling its oil at prices not seen years ago. Buyers have few alternatives between Western sanctions on Russia and US sanctions on Venezuela and Iran. It’s a seller’s market.
Yet news of the resurgence of Covid in China has raised suspicions that the market is about to tip over. After all, China is the world’s largest importer in terms of absolute volumes, and imports are already down palpably because of the lockdowns. If China needs less oil, less oil should be available.
Europe seems to be presenting itself as a bigger customer for OPEC oil at the moment, but that would be a temporary thing as the EU tries to wean itself off Russian hydrocarbons by replacing them with hydrocarbons from elsewhere.
Europe is not a long-term growth market for OPEC oil and, to put it bluntly, is therefore not an important market for the cartel. This is especially true of the two OPEC producers who have the spare capacity to significantly increase their production.
So if bearish expectations for oil continue to escalate, depending on how China’s coronavirus spread unfolds and what the EU does about Russian oil, we may well see OPEC revise its production growth deal with Russia and the rest of its OPEC+ partners ahead of this year’s deal. to finish.
By Irina Slav for Oilprice.com
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