The European Union (EU) is poised to ban Russian oil imports as part of a new wave of possible sanctions. If agreed, Russian oil companies will be forced to shut in more wells. Even so, steadily rising output elsewhere, coupled with slower demand growth, especially in China, is expected to fend off an acute supply deficit in the near term, the International Energy Agency (IEA) said in its May issue Oil Market Report (OMR).
“Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023. Moreover, extended lockdowns across China where the government struggles to contain the spread of COVID-19 are driving a significant slowdown in the world’s second largest oil consumer,” IEA said.
In the May issue OMR, IEA forecasts world oil demand growth to slow to 1.9 million b/d in second-quarter 2022 from 4.4 million b/d in first-quarter 2022 and to ease to 490, 000 b/d on average in second-half 2022 on a more tempered economic expansion and higher prices.
More specifically, as summer driving escalates and jet fuel continues to recover, world oil demand is set to rise by 3.6 million b/d from April to August. For 2022 as a whole, demand is expected to increase by 1.8 million b/d on average to 99.4 million b/d.
Supply
On the supply side, Russia shut in nearly 1 million b/d in April, driving down world oil supply by 710 ,000 b/d to 98.1 million b/d. Over time, steadily rising volumes from Middle East OPEC+ and the US along with a slowdown in demand growth is expected to fend off an acute supply deficit amid a worsening Russian supply disruption. Excluding Russia, output from the rest of the world is set to rise by 3.1 million b/d from May through December, according to IEA.
Global refinery margins have surged to extraordinarily high levels due to depleted product inventories and constrained refinery activity, IEA noted.
“Global refinery maintenance and capacity constraints are exacerbating dislocations caused by Russia’s war in Ukraine. During April, crude and product markets saw diverging trends. While crude prices trended lower overall, diesel and gasoline cracks surged to record levels, pulling up refinery margins and end-user prices,” IEA said.
Throughputs in April fell 1.4 million b/d to 78 million b/d, the lowest since May 2021, largely driven by China. Between now and August, IEA expects runs to ramp up by 4.7 million b/d, but the tightness in product markets is expected to continue based on the agency’s current oil demand outlook.
Global observed oil inventories declined by a further 45 million bbl during March and are now a total 1.2 billion bbl lower since June 2020. In the OECD region, the release of 24.7 million bbl of government stocks during March halted the precipitous decline in industry inventories. OECD industry stocks rose by 3 million bbl to 2.62 billion bbl but remained 299 million bbl below the 5-year average. Preliminary data for April show OECD industry inventories increased by 5.3 million bbl.
“Limited spare capacity in the global refining system, together with reduced exports of Russian fuel oil, diesel and naphtha have aggravated the tightness in product markets, which have now seen seven consecutive quarters of stock draws. While a first tranche of SPR releases halted the precipitous decline in OECD industry stocks in March, crude made up the majority of it and product stocks have continued to fall. Notably, middle distillate reserves reached their lowest levels since April 2008,” IEA said.
Crude prices fell in April to trade in a narrow $10/bbl range above $100/bbl. ICE Brent last traded around $105/bbl and WTI $102/bbl. Rapid early-May advances on the sixth round of EU sanctions for Russia drove renewed price tensions. High crude prices and exceptional product cracks are supporting strong inflation trends, IEA noted.
