Opec cuts oil demand forecast on Ukraine crisis

Oil group reduces world’s oil demand forecast by 310,000bpd for 2022

Opec on Thursday cut its forecast for growth in world oil demand in 2022 for a second straight month, citing the impact of Russia’s invasion of Ukraine, rising inflation and the resurgence of the Omicron coronavirus variant in China.

In a monthly report, the Organisation of the Petroleum Exporting Countries (Opec) said world demand would rise by 3.36 million barrels per day (bpd) in 2022, down 310,000bpd from its previous forecast.

The Ukraine war sent oil prices briefly above $139 a barrel in March, the highest since 2008, worsening inflationary pressures. Opec has cited suggestions that China, with strict Covis lockdowns, is facing its biggest demand shock since 2020 when oil use plunged.

“Demand in 2022 is expected to be impacted by ongoing geopolitical developments in Eastern Europe, as well as Covid-19 pandemic restrictions,” Opec said in the report.

Nonetheless, Opec still expects world consumption to surpass the 100 million bpd mark in the third quarter, and for the 2022 annual average to just exceed the prepandemic 2019 rate.

Opec cited rising inflation and continued monetary tightening, and lowered this year’s economic growth forecast to 3.5 per cent from 3.9 per cent, adding upside potential was “quite limited”.

“It may come from a solution to the Russia and Ukraine situation, fiscal stimulus where possible, and a fading pandemic, in combination with a strong rise in service sector activity,” Opec said.

Oil extended an earlier decline after the report was released, trading further below $106.

The current and expected sanctions on Russian oil have received a major counter in the form of reduced demand and increased (strategic petroleum reserve) supplies

Jim Ritterbusch, president of Ritterbusch and Associates

Lower russian output seen

Opec and its allies which include Russia, known as Opec+, are unwinding record output cuts put in place during the worst of the pandemic in 2020 and have rebuffed Western pressure to raise output at a faster pace.

At its last meeting, Opec+ swerved the Ukraine crisis and stuck to a previously agreed plan to boost its monthly output target by 432,000bpd in June.

Opec+ has been undershooting the increases due to underinvestment in oilfields in some Opec members and, more recently, losses in Russian output as a result of sanctions and buyer avoidance. The report showed Opec output in April rose by 153,000bpd to 28.65 million bpd, lagging the 254,000bpd rise that Opec is allowed under the Opec+ deal.

The growth forecast for nonopec supply in 2022 was reduced by 300,000bpd to 2.4 million bpd. Opec cut its forecast for Russian output by 360,000bpd and left its US output growth estimate largely unchanged.

Opec expects US tight oil supply to rise by 880,000bpd in 2022, unchanged from last month, although it said there was potential for further expansion later in the year.

Oil rises

Meanwhile, oil prices rose on Thursday, reversing earlier losses, as supply concerns and geopolitical tension in Europe got the upper hand over the economic fears dogging financial markets as inflation soars.

Brent crude rose 46 cents, or 0.4 per cent, to $107.97 a barrel by 1644GMT. WTI crude rose $1.14, or 1.1 per cent, to $106.85.

“The trading has been thin and nobody knows what’s going to move the needle,” said John Kilduff, partner at Agan Capital LLC in Galena, illinois.

A pending European Union ban on oil from Russia, a key supplier of crude and fuels to the bloc, is anticipated to further tighten global supplies.

The EU is still haggling over details of the Russian embargo, which needs unanimous support. However, a vote has been delayed

as Hungary opposes the ban because it would be too disruptive to its economy.

More broadly, oil prices and financial markets have been under pressure this week amid jitters over rising interest rates, the strongest US dollar in two decades, concerns over inflation and possible recession.

Prolonged Covid-19 lockdowns in the world’s top crude importer, China, have also impacted the market.

“The current and expected sanctions on Russian oil have received a major counter in the form of reduced demand and increased (Strategic Petroleum Reserve) supplies,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illnois.

US headline CPI for the 12 months to April jumped 8.3 per cent, fuelling concerns about bigger interest rate hikes, and their impact on economic growth.

“Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023,” the International Energy Agency (IEA) said on Thursday in its monthly report.

“Extended lockdowns across China ... are driving a significant slowdown in the world’s second largest oil consumer,” the agency added.

On Wednesday, oil prices jumped five per cent after Russia sanctioned 31 companies based in countries that imposed sanctions on Moscow following the Ukraine invasion.

That created unease in the market at the same time that Russian natural gas flows to Europe via Ukraine fell by a quarter. It was the first time exports via Ukraine have been disrupted since the invasion. — reuters