As international oil prices struggle near the $100 mark, OPEC and the International Energy Agency (IEA) have some disagreements about future demand prospects.
On August 11, local time, OPEC, which represents oil-producing countries, released its latest monthly report, predicting that the oil market will be “oversupplied” in the third quarter, and at the same time lowered its demand forecast for this year by 260,000 barrels per day. The IEA, which represents consuming countries, predicts that high natural gas prices will stimulate oil demand and raises its forecast for global oil demand growth this year by 380,000 barrels per day.
Judging from market performance, the IEA’s optimistic forecast of increasing demand growth prevailed. On August 11, the price of light crude oil futures for September delivery on the New York Mercantile Exchange rose 2.62% to close at US$94.34 per barrel; October delivery London Brent crude oil futures prices rose 2.26% to close at $99.60 a barrel. On August 12, international oil prices fluctuated, and Brent crude oil futures once returned above the $100 mark.
Zhu Runmin, a senior economist in the petroleum industry, analyzed to a reporter from the 21st Century Business Herald that the differences in the forecasts of the two organizations are inevitable and stem from the basic data and calculation methods based on the forecasts. This is a characteristic of economic data and economic forecasts compared to natural science. . The International Energy Agency’s upward revision of its demand forecast has clearly driven an increase in international crude oil prices on the day the data was released. However, whether this is sustainable depends on changes in actual market supply and demand conditions.
Regarding the volatile oil market, Wang Chengqiang, director of the New Era Futures Research Institute, told reporters that international oil prices have recently fallen back to the price level before the Russia-Ukraine conflict to take into account expectations of economic recession and weak aggregate demand. The contradiction between supply and demand in the crude oil market is extremely prominent, which determines the prospect of high market volatility. European and American sanctions against Russia and politicization of the energy economy have created hidden dangers of unstable energy supply, shortages in the supply and demand structure, and soaring prices. The interest rate hikes in Europe and the United States to combat inflation have increased the risk of economic recession, and high crude oil prices have created vulnerabilities at the demand level. . It is expected that the crude oil market will be characterized by high prices and high volatility in the long term.
OPEC, IEA forecasts diverge
On August 11, OPEC predicted in its latest monthly report that the global oil market will enter a state of oversupply in the third quarter and lowered its forecast for global oil demand growth this year. This is the third downward revision since April. OPEC expects that global oil demand will still increase by 3.1 million barrels per day in 2022 to 100.3 million barrels per day, but this is 260,000 barrels per day less than the previous forecast. OPEC maintains its growth forecast for 2023 at 2.7 million barrels per day. constant.
This may mean that OPEC sees no need to increase production further in the short term. OPEC+ announced last week that it would increase production by 100,000 barrels per day in September, the smallest increase in history. Echoing this, the IEA also stated that OPEC+ is unlikely to increase production in the coming months due to limited spare capacity.
Contrary to OPEC, the IEA raised its forecast for global oil demand growth in 2022 by 380,000 barrels per day to 2.1 million barrels per day in its latest report. Global crude oil demand is expected to be 99.7 million barrels per day this year. The IEA predicts that crude oil demand will grow by 2.1 million barrels per day to 101.8 million barrels per day in 2023.
Zhu Runmin analyzed that different institutions have different statistical calibers and data sources, which will inevitably lead to inconsistent forecast results. OPEC’s downward revision of demand growth is based on a previously higher forecast base; while the International Energy Agency’s upward revision of demand growth is based on a previously lower base. OPEC and the International Energy Agency’s downward revisions and then upward revisions have just narrowed the difference in oil demand growth forecasts between the two organizations. As 2022 gradually passes, the two oil demand growth forecasts will become closer and closer.
At the same time, some people believe that OPEC’s “oversupply theory” is paving the way for the next stop to increase production. OPEC does not want to continue to increase production and allow oil prices to continue to fall, thus affecting its own interests.
It should be noted that although global crude oil demand will maintain growth this year, the IEA expects demand growth to slow to only 40,000 barrels/day in the fourth quarter of 2022 from 5.1 million barrels/day in the first quarter of 2022.
In this regard, Zhu Runmin analyzed that the impact of the new crown epidemic will gradually subside in the fourth quarter of 2021, oil demand will continue to recover, and the data will be relatively stable. In the fourth quarter of 2022, high oil prices and economic slowdown will significantly suppress oil demand and oil consumption growth will weaken.
The long-short game will continue
Affected by multiple uncertain factors such as the global economy and the situation between Russia and Ukraine, the game between long and short forces will continue.
From the supply side, the IEA said that as Russia reduces its refining scale, oil production will decrease month by month as soon as this month. Next, as the EU import ban takes effect, the rate of decline will accelerate. By early 2023, Russia’s output will be close to 2 million barrels per day, a drop of about 20%.
The EU will suspend the purchase of most crude oil from Russia from December 5 this year, and the EU’s ban on Russian petroleum products will take effect from February 5 next year. The IEA estimates that about 1 million barrels per day of Russian petroleum products and 1.3 million barrels of crude oil will need to find new buyers due to planned EU restrictions.
However, the current impact on Russian crude oil exports is not as serious as outsiders fear. Although Russia’s crude oil exports to Europe, the United States, Japan and South Korea have dropped by 2.2 million barrels per day since the start of the Russia-Ukraine conflict, some exports have been diverted to India, Turkey and other countries.
Specifically, compared with before the conflict between Russia and Ukraine, Russia’s crude oil production capacity fell by only 310,000 barrels per day in July, and overall export volume only fell by 580,000 barrels per day. Revenue from Russian crude oil exports in July was nearly US$19 billion. Due to the decline in international oil prices and reduced export volume, revenue in July dropped by US$2 billion from June.
When Russia’s supply is likely to gradually decrease, other oil-producing countries are actually limited in their efforts to increase production. On August 3, OPEC+ agreed to increase production by 100,000 barrels per day in September, setting a record for the smallest increase in production. This result is lower than the previous market consensus. Estimated 300,000 barrels/day to 400,000 barrels/day.
In this regard, Goldman Sachs analyst Michele Della Vigna said that OPEC+ production capacity is at a low point in twenty years, and idle production capacity has basically been exhausted. Therefore, he judged that the global energy crisis cannot be solved in the short term.
From the demand side, economic growth slowdown or even recession in various countries will be negative for oil prices. Wang Chengqiang said that the recent inversion in the long-term and short-term yields of U.S. Treasury bonds has continued to expand. The difference between the yields of 10-year and 2-year Treasury bonds once reached negative 56 basis points on the 10th. The Fed’s hawkish interest rate hike process will most likely drag the United States into recession. . Expectations of an economic recession and high inflation are weighing on consumer confidence and curbing crude oil demand growth.
However, soaring natural gas prices have boosted demand for crude oil to some extent. The IEA said in its monthly report that natural gas and electricity prices have soared to new records, inspiring some countries to switch from natural gas to oil, and that demand for oil from European industry and power generation is extremely strong. The EU plans to reduce natural gas consumption in member states by 15% from August 2022 to March 2023, which will increase oil demand by approximately 300,000 barrels per day in the next six quarters.
From another perspective, Zhu Runmin said that rising natural gas prices not only stimulate the demand for crude oil, but may also have a restraining effect. High natural gas prices will stimulate natural gas users to switch to oil and stimulate oil demand. But not all natural gas needs can be replaced by oil, and rising natural gas bills may also inhibit consumer spending in areas such as gasoline, which may be more obvious for households.
Equipment issues also need attention. Zhu Runmin reminded that equipment limitations are the main obstacle to switching from natural gas to oil power generation. Unless there is room for choice in the design, different fuels cannot be easily replaced.
Wang Chengqiang told reporters that for a long time, “oil-to-gas” has been the development direction of the industry. However, due to the European energy crisis, the abnormal rise in electricity and natural gas prices, the energy economy has reversed history, and a partial “gas-to-oil” phenomenon has occurred. Substitution of oil and natural gas generally occurs in the transportation sector, power sector and other fuel sectors. Due to regional differences in oil and gas usage and device differences, there are many restrictions on substitution, and large-scale conversion is often not achievable in the short term. Therefore, in the IEA’s expectation for the conversion of natural gas to crude oil usage habits, the additional demand for crude oil is only about 30%. Thousands of barrels/day.
Overall, under the intertwined influence of long and short factors such as supply risks and concerns about economic recession, if the energy game between Russia and the West does not escalate sharply, the contradiction between supply and demand in the oil market may gradually ease.
Regarding the future, Zhu Runmin said that there are three main factors affecting the supply and demand relationship. One is the changes and development of the world economy, which is a major variable affecting oil demand; the other is the U.S. dollar exchange rate. The U.S. dollar’s strong cycle has not yet ended, and coupled with high oil prices, The inhibitory effect on oil consumption will also be highlighted; thirdly, in terms of oil production, when the price is at a relatively high level, the sustained and steady growth of output will not change, but it is unlikely to increase significantly in the short term. Taking into account the current world economic situation, the US dollar index level, international crude oil price levels, and global oil production levels, the tight supply and demand situation in the oil market in the past period may gradually ease.
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