IEA trims oil demand outlook for 2022 and 2023 amid extreme market uncertainty

A worsening macroeconomic outlook and fears of a recession are hurting market sentiment while continuing risks remain on the supply side

Global oil demand is now expected to expand by 1.7 million barrels per day in 2022 to reach 99.2 million bpd, according to the IEA. Photo: Reuters

The International Energy Agency has trimmed its global oil demand forecast for this year and the next as the worsening macroeconomic outlook and fears of a recession dampen market sentiment.

Oil demand is now expected to expand 1.7 million barrels per day in 2022 (down slightly from the IEA's forecast of 1.8 million bpd in June) and 2.1 million bpd in 2023 (compared with the 2.2 million bpd June forecast), to reach 99.2 million bpd and 101.3 million bpd, respectively, the Paris-based agency said in its latest monthly Oil Market Report.

"The deceleration of economic activity is adding further uncertainties to our oil demand forecast but, for now, we have only modestly trimmed our outlook for 2022 and 2023," it said.

"High fuel prices have started to dent oil consumption in the OECD [Organisation for Economic Co-operation and Development], but this was largely countered by a stronger-than-expected demand rebound in emerging and developing economies led by China as it starts to emerge from Covid lockdowns."

The IEA's forecast for 2023 is lower than Opec's prediction, which expects demand growth to reach 2.7 million bpd to average 103 million bpd next year.

A solid economic performance in major consuming countries, as well as improved geopolitical developments and the containment of Covid-19 in China will support oil demand in 2023, Opec said on Tuesday.

Oil prices have been extremely volatile in recent weeks, with Brent, the benchmark for two thirds of the world's oil, falling about 7 per cent to reach below $100 a barrel overnight on Tuesday after the International Monetary Fund downgraded the growth rate of US, the world's largest economy.

Brent rebounded on Wednesday and was up 0.66 per cent to $100.15 a barrel at 2.06pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 0.81 per cent higher at $96.62 a barrel.

On Tuesday, the IMF downgraded its US economic growth forecast to 2.3 per cent this year, from a 2.9 per cent projection last month and cut the country's outlook for 2023 to 1 per cent compared with its previous 1.7 per cent estimate.

The fund also warned that the surge in inflation, which hit 9.1 per cent in June, posed "systemic risks" to the US and global economy.

The IMF has cautioned that a recession next year cannot be ruled out, given the elevated risks.

The World Bank has also warned that Russia’s invasion of Ukraine and its effects on commodity markets, supply chains, inflation and financial conditions have accentuated the slowdown in global economic activity. It now expects world economic growth to ease to 2.9 per cent in 2022 from 5.7 per cent in 2021.

"Rarely has the outlook for oil markets been more uncertain. A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side," the IEA said.

"For now, weaker-than-expected oil demand growth in advanced economies and resilient Russian supply has loosened headline balances. Benchmark crude futures have tumbled by more than $20 per barrel since early June ... Yet, persistent physical crude price tensions and extreme refinery margins highlight underlying imbalances for crude and products supply."

World oil supply jumped by 690,000 bpd to 99.5 million bpd in June as resilient Russian production and higher output from the US and Canada more than offset steep maintenance-related losses from Kazakhstan, the IEA said.

Total OECD production of crude oil, natural gas liquids and refinery feedstocks increased by 4.7 per cent in April 2022 on an annual basis, the IEA said in a separate statistics report released on Wednesday.

Production is further expected to rise by 1.8 million bpd by end-year to reach 101.3 million bpd.

Global oil supply is set to average 100.1 million bpd in 2022 before hitting an annual record of 101.1 million bpd in 2023, indicating that supply will be able to meet demand in the market.

"Our forecast was revised slightly higher for oil supply for the remainder of the year due to Russia’s surprisingly strong performance," the IEA said.

While world oil supply is expected to grow by roughly 1.8 million bpd through December, "rising short-term risks to oil supply in Kazakhstan, Libya and elsewhere have put the spotlight on spare capacity, which now is held primarily by Saudi Arabia and the UAE", the report said.

The Opec+ group's planned oil production quota targets end in August, and it is due to meet on August 3 to discuss its strategy for September and beyond.

"Global oil inventories remain critically low, with recent builds concentrated in China, where refiners reduced runs due to weaker demand amid Covid lockdowns," the IEA said.

While OECD industry stocks have recovered due to sizeable government stock releases, they remain nearly 300 million barrels below their five-year average.

Looking ahead, as the EU's embargo on Russian oil comes into full force at the end of the year, the market may tighten once again, the Paris-based agency said.

"With readily available spare capacity running low in both the upstream and downstream, it may be up to demand side measures to bring down consumption and fuel costs that pose a threat to stability, most notably in emerging markets," it said.

"Without strong policy intervention on energy use, risks remain high that the world economy falls off-track for recovery."