Crude pundits are divided – literally on geopolitical lines, depicting the fault lines within the industry. Two contrasting scenarios are emerging. On one end is the demand gloom, while on the other is the possibility of a rise in global crude consumption.
The Organization of Petroleum Exporting Countries (OPEC) is saying a fall in global crude consumption is in the making, while the Paris-based International Energy Agency, the OECD energy watchdog, is forecasting a rise in global crude demand.
In its August Monthly Oil Market Report (MOMR), OPEC underlined that the global crude oil demand was set to fall in 2022 by another 260,000 barrels per day (bpd). Bloomberg reported that OPEC now expects global oil markets to tip into surplus this quarter as it downgraded the outlook for demand and bolstered estimates for rival supplies.
Underlining the recessionary phase that the world is entering, OPEC, in its August MOMR, substantially cut its projection for the call on its crude in the third quarter of 2022. Per its projections, the volume of crude OPEC would need to pump in the third quarter has now been cut by 1.24 million barrels per day to 28.27 million bpd. Interestingly, that’s about 570,000 barrels a day less than the OPEC pumped in July.
As per the OPEC projections, global crude oil demand this quarter would decrease by 720,000 bpd, to an average of 99.93 million bpd in the three months. In the meantime, OPEC has also boosted its projections for non-OPEC supply by 520,000 bpd. That meant the call on OPEC crude would decrease by 1.24 million bpd from its earlier projections.
Analysts feel that the recent decision of the expanded OPEC+, which also included Russia, to increase its output in September by just 100,000 bpd needs to be understood from this perspective. The OPEC decision to enhance its output by this meagre volume, despite the personal request from U.S. President Joe Biden to open taps, was interpreted by analysts in many ways. However, OPEC sees the market demand declining and not firming up.
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Not everyone seems to agree with these projections. As per media commentaries, OPEC’s lower revision of global crude demand diverges considerably from the projections of the International Energy Agency (IEA). Last Thursday, the IEA bolstered its global crude demand forecasts. In its Monthly Oil Report (MOR), the IEA has raised its estimates of 2022 global demand growth by 380,000 bpd to 2.1 million bpd. The upward projection, despite the looming recessionary pressures, was based on the fact that the soaring natural gas prices have compelled some companies and refiners to switch to using oil. Soaring oil use for power generation and gas-to-oil switching are boosting demand, the report added.
With several regions experiencing blazing heatwaves, the latest data confirm increased oil burn in power generation, especially in Europe, the Middle East, and across Asia. The report added that fuel switching is also taking place in European industry, including refining.
As per the IEA, the burden of satisfying global oil demand growth in the latter part of the year will fall on countries outside the Organization of Petroleum Exporting Countries and its allies. Non-OPEC+ supply is projected by the IEA to rise by 1.7 million bpd this year and 1.9 million bpd next year. That’s a significant acceleration compared with last year but still falls short of 2.1 million barrels a day of demand growth expected in 2022 and 2023, the IEA added.
The IEA report also highlights that OPEC+ is unlikely to substantially increase its crude output in the coming months because of limited spare capacity. “Comparatively low levels of operational spare production capacity, held mainly by Saudi Arabia and the United Arab Emirates, may thus all but rule out further OPEC+ output increases in the coming months,” the IEA said in its monthly report.
The report also underlined that the “largely symbolic” 100,000 bpd hike promised by the OPEC for September may turn into a cut as Russian production declines. All this could mean a strengthening of the crude markets in the coming months, as the IEA seemed to be projecting.
However, Iran remains a wild card in the entire equation. There are now hints that Iran and the United States are on the brink of an agreement on reviving the JCPOA. If that happens, a million barrels of oil a day could be added to the global energy market. But even if an agreement is reached, it won’t be the “light switch” fix to a global energy crunch, RBC commodities chief Helima Croft pointed out in an interview.
We are in interesting ‘crude’ times – as always.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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