OPEC, IEA see oil demand converging, bullish on risks: Russell – Markets

LAUNCESTON: Forecasts for global crude oil demand were raised by the International Energy Agency (IEA) and lowered by OPEC in reports last week, but the apparent diverging opinions have actually masked a convergence growing between consumer and producer groups.

Market sentiment on separate reports last week was largely that the Organization of the Petroleum Exporting Countries cut its 2022 oil demand growth forecast for the third time since April, while the AIE raised its estimate.

This is an entirely accurate assessment, but as usual the devil is in the details, and the two reports show remarkable similarities in the overall picture presented.

OPEC said in its August 11 monthly report that it expects oil demand in 2022 to rise by 3.1 million barrels per day (bpd), or 3.2%, a decline 260,000 bpd from its previous forecast.

The IEA, in its report the same day, raised its forecast by 380,000 bpd for oil demand growth of 2.1 million bpd in 2022.

While these headline-grabbing numbers look different, the headline figure for global oil demand in 2022 is now much closer, with OPEC forecasting 100.03 million bpd and the IEA forecasting 99.7 million. bpd.

That’s a difference of just 330,000 bpd, which in a larger context is largely insignificant.

The gap between the adviser to industrialized nations and the biggest oil-producing group on global demand growth in 2022 has also narrowed in recent months, reaching 1.1 million bpd at the time of their April reports. .

There is a similar dynamic driving the convergence of views, with both August reports pointing to an ongoing recovery in major importer China and increased use of crude oil and fuel oil for power generation amid extremely high coal and natural gas prices after the February 24 Russian invasion. Ukraine.

“The surge in oil use for power generation and the shift from gas to oil is driving demand,” is how the IEA characterized the growth in oil demand. The OPEC report spoke of “the continued healthy growth includes the recently observed trend of burning more crude oil in power generation.”

What is less certain is whether the trend to burn crude oil and fuel oil for power generation is going to be a sustained trend, or if it is a short-term phenomenon that will s fade.

Oil demand rises as gas prices rise (IEA)

Admittedly, much of the use of oil for power generation is a seasonal factor in the northern hemisphere, especially in oil-producing and hot-climate countries like Saudi Arabia.

But for oil to become a sustainable factor in power generation, thermal coal prices would need to remain at near record highs, as well as real shortages of natural gas in Europe, as opposed to the current fear of shortages. and concerns about Russian gas pipeline flows ahead of the Nordic winter.

Russia Postman

One thing the IEA and OPEC are pretty clear about is that the drop in supply of Russian oil and refined products hasn’t been all that dramatic, although the risk is that it will become more of a factor in the coming months.

Russian coal and liquefied natural gas (LNG) exports are also holding close to pre-invasion levels, meaning the real disruption to global markets is related to shifting flows rather than loss of volumes. .

What is not disputed are the massive increases in energy prices, particularly in Europe, which have caused inflation and monetary tightening.

It is perhaps surprising that the IEA and OPEC are relatively optimistic about the global economic outlook, even though inflation is at its highest level in three decades and several major industries, particularly in

Europe faces energy restrictions.

Although consumer demand may hold, sustained inflation, high energy prices and tighter monetary policy will likely undermine spending and investment in the global economy before too long.

Indeed, the IEA and OPEC, in forecasting higher growth in oil demand this year and in 2023, are betting that the current inflation and Russian supply problems will be short-lived and that the he global economy will see strong growth next year.