Opec lowered its supply and demand forecasts in its monthly market report as a result of the Ukraine war as well as lockdowns in China and fears of lower consumption. Oil prices moved back above $100 a barrel, increasing the likelihood that the bloc and its alliance of producers in Opec+ will stick with their monthly production targets.
Brent, the global benchmark for two thirds of the world's oil, was trading 0.54 per cent higher at $105.20 per barrel at 1.13pm UAE time on Wednesday, while West Texas Intermediate, the gauge that tracks US crude, was up 0.42 per cent at $101.85 per barrel.
Opec, which represents some of the top oil producers, said global demand will rise by 3.67 million barrels per day in 2022, down 480,000 bpd from its previous forecast. Total consumption is expected to surpass the 100 million bpd mark in the third quarter, as predicted previously by the oil group.
“In 2022, oil demand growth was revised to the downside … accounting for declines in global GDP [gross domestic product] on account of the geopolitical developments and the resurgence of the Omicron variant on global oil demand in China,” Opec said.
The group lowered their growth forecast for the global economy to 3.9 per cent this year from last month’s assessment of 4.2 per cent in the wake of the Russia-Ukraine conflict, as well as a surge in the coronavirus infections in China, the world’s second-largest economy, and rising inflation.
The International Monetary Fund is also set to lower its global growth estimate for 2022 when it releases an update to its World Economic Outlook this month. The Washington-based fund has already lowered its global growth projection for 2022 to 4.4 per cent.
“While it is forecast that both Russia and Ukraine will be facing recessions in 2022, the rest of the global economy will be thoroughly impacted as well,” Opec said.
“The strong rise in commodity prices in combination with ongoing supply-chain bottlenecks and Covid-19-related logistical logjams in China and elsewhere are all fuelling global inflation, which was already at a high level.”
In March, oil prices soared above $139 a barrel, the highest since 2008, worsening inflationary pressures.
Prices have since eased as the US and other International Energy Agency (IEA) member countries announced plans to release 120 million barrels of oil from their emergency reserves to boost supply in global markets. This is on top of the 120 million barrels that the US plans to release from its Strategic Petroleum Reserve, which will bring the total additional supply to the market to 240 million barrels worldwide.
Opec lowered both its supply and demand forecasts “as a consequence of the war in Ukraine,” Emirates NBD said in a note on Wednesday. “With near even impacts on both sides of oil market balances, that helps to reinforce the Opec+ position of only gradually returning barrels to the market.”
Opec and its allies, including Russia, are unwinding record output cuts put in place in 2020. The group will add another 432,000 bpd of crude to the market in May, staying the course of incremental increases in global oil supply, it said last month.
“The black gold seems to be in the price recovery stage again as traders feel more optimistic about oil demand,” said Naeem Aslam, chief market analyst at Avatrade. “The critical price level for Brent oil prices is $100, and as long as the price continues to trade above this support zone, we are likely to see a continuation of the upward trend.”
Oil traders will also be watching US crude inventory data closely, as the release of the US strategic oil reserves pushed oil prices lower.
“If we see the inventory data showing a significant drawdown, we could see bulls pushing oil prices higher and vice versa,” Mr Aslam said.
Non-Opec supply in 2022 is forecast to fall by 300,000 bpd to 2.7 million bpd due to a decline in supplies from Russia following sanctions, according to Opec.
Russia is the world's second-largest energy exporter, accounting for about 10 per cent of the world’s energy output, including 17 per cent of its natural gas and 12 per cent of its oil. The US and UK have already banned Russian oil imports.
Total Opec crude oil production averaged 28.56 million bpd in March, up 57,000 bpd from the previous month. Crude oil output increased mainly in Saudi Arabia, Kuwait and the UAE, while production declined in Libya, Nigeria and Congo, Opec data based on secondary sources revealed.
The 23-member Opec+ group will hold its next meeting on May 5 to review market dynamics and decide about future production.
On Wednesday, the IEA also revised down its outlook for 2022 global demand for oil because of the lockdowns in China.
The Paris-based agency forecasts consumption dropping by 260,000 barrels, it said in its monthly report, with demand now expected to average 99.4 million bpd in 2022, which is up by 1.9 million bpd from 2021.
“Severe new lockdown measures amid surging Covid cases in China have led to a downward revision in our expectations for global oil demand in 2Q 22 and for the year as a whole,” the IEA said.
Key takeaways from Opec monthly report:
♦ Crude oil spot prices rose for the third consecutive month in March. The benchmark gained more than $20 per barrel on a monthly average and WTI gained almost $17 a barrel, on escalating geopolitical tensions in Eastern Europe and concerns this might result in large oil supply shortages, amid trade dislocations
♦ World economic growth in 2022 is revised down to 3.9 per cent from 4.2 per cent in the previous month’s assessment. This takes into account the impact of the Russia-Ukraine conflict, as well as the effects from the pandemic, with the risks skewed to the downside
♦ World oil demand growth in 2021 is revised slightly down by 0.04 million bpd, standing now at 5.7 million bpd
♦ Non-Opec supply in 2022 is revised down by 0.3 million bpd to 2.7 million bpd, mainly due to a downward revision for Russia.