Oil demand outlook faces ‘myriad’ of headwinds: IEA

The outlook for global oil demand faces a "myriad" of headwinds over the next few months, with consumption unlikely to regain meaningful momentum until the second quarter of next year, the IEA said in its latest monthly Oil Market Report (OMR).

The rising odds of a global economic recession, China's persistently weak economy, Europe's energy crisis, soaring product margins — notably for diesel — and a strong US dollar have all weighed heavily on oil demand for most of 2022 and will continue to do so for the foreseeable future, the IEA said on 15 November.

The Paris-based energy watchdog singles out high diesel prices as a key factor fuelling inflation and adding pressure on the global economy. The closure of 3.5mn b/d of global refining capacity since the start of the Covid-19 pandemic meant diesel markets were in deficit even before Russia's invasion of Ukraine, it said, adding that the EU's upcoming embargoes on Russian crude and oil products will pile further pressure on already tight diesel markets. A proposed Russian oil price cap "may help alleviate tensions, yet a myriad of uncertainties and logistical challenges remain", it said.

The IEA, despite the gloomy outlook, raised its forecast for global oil demand growth this year by 180,000 b/d to 2.11mn b/d, driven by an upwards revision to Chinese demand. But it still expects a 240,000 b/d contraction in global consumption this quarter compared with the same period last year, albeit not as severe as the 340,000 b/d drop forecast in last month's OMR.

It forecasts demand growth slowing next year to 1.61mn b/d, which marks a 40,000 b/d cut compared with its previous forecast. "Economic indicators remain unremittingly weak amid fears that hawkish central bank policies to combat soaring inflation may push the global economy into recession," it said. The IEA has reduced its forecast for Chinese oil demand growth in 2023 to 780,000 b/d from 820,000 b/d in last month's report, with the country's prospects "handicapped by an unprecedented property slump and ongoing lockdowns".

Supply slump

The IEA estimates that global oil supplies rose by 410,000 b/d to 101.7mn b/d last month but it expects a 1mn b/d fall over the rest of the year, underpinned by Opec+ cuts and the EU's ban on Russian seaborne crude imports. Global production, despite the anticipated drop over the next two months, is still forecast to outpace demand for the rest of 2022, it said. The agency is sticking to its forecast for annual global supply growth of 4.6mn b/d this year, leaving full-year output at 99.99mn b/d.

The agency has global oil supply growth slowing to 740,000 b/d in 2023 compared with a forecast rise of 760,000 b/d in last month's OMR. It expects output from non-Opec+ countries to increase by 1.8mn b/d next year, led by the US, Brazil and Norway, partially offset by a drop of around 1.1mn b/d in Opec+ output on the back of a sharp fall in Russian production.

"If maintained through 2023, the Opec+ decision to cut official production targets slows growth outside of Russia to just 340,000 b/d. And as more buyers are expected to shun Russia supplies, the country's output is projected to fall by 1.4mn b/d," it said.

The IEA estimates that Russian oil exports rose by 165,000 b/d to 7.7mn b/d in October, as shipments to the EU, China and India held up. Russian crude exports to the EU crude were 1mn b/d below pre-war levels at 1.5mn b/d last month, while product exports were down by 300,000 b/d to 1mn b/d, including 600,000 b/d of diesel.

By James Keates