IEA reduces estimate of oil demand in the face of closures in China

(Bloomberg) — The International Energy Agency (IEA) cut its forecast for oil demand this year after China reimposed lockdowns to contain the spread of a new coronavirus outbreak.

With the prospect of weaker demand and the massive release of emergency oil reserves by IEA members, the agency now foresees a balance in global markets for much of the year. Crude oil prices have already lost most of their gains since Russia's attack on Ukraine, to trade on Wednesday at around US$100 per barrel in New York.

“We are now seeing economic forecasters continue to degrade their outlook for the global economy and, obviously, this will have an impact on oil demand,” said Toril Bosoni, head of the IEA's markets and industry division, in an interview with Bloomberg Television. “The market seems more balanced.”

The Paris-based agency, which advises most major economies, reduced projections for global fuel consumption this year by 260,000 barrels per day, with a particularly sharp decline of 925,000 per day for China in April. However, global demand is still on track to increase this year.

The IEA also reduced estimates of the loss of Russian supplies due to an international boycott for its military aggression. Production in April could be 1.5 million barrels per day lower than in the previous month, roughly half the drop previously expected. Even so, those losses could double in May, the IEA said.

Oil far exceeded US$100 a barrel after Russia's attack on its neighbor. While prices have fallen, they are still high enough to fuel inflationary pressures and exacerbate a cost-of-living crisis for millions of consumers. To counter that, IEA members announced last week that they will release 240 million barrels from emergency reserves, the largest release of reserves in the agency's history.

The outbreak in China

“Prices are now close to pre-invasion levels, but remain worryingly high and pose a serious threat to global economic prospects,” the IEA said.

World oil consumption will expand by 1.9 million barrels per day to a daily average of 99.4 million this year, according to the IEA.

“Demand for oil is still recovering from covid,” Bosoni said. “The aviation sector is recovering, there is a cumulative demand, so we expect growth. But obviously there is a downside risk if the economic outlook deteriorates.”

China's strict zero-covid policy has slowed demand growth, as millions of inhabitants remain locked in their homes, imports decline and trade activity slows in the second largest economy in the world.

The IEA noted that Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries (OPEC+) have refused to release reserves faster, partly because of the belief that markets did not face genuine scarcity and partly to preserve the OPEC+ coalition it leads alongside Russia.

OPEC+ members managed to provide only 10% of the supply increase scheduled for March, according to the IEA. The 19 members of the coalition, who have committed to a pact to stabilize markets since the beginning of the pandemic, added only 40,000 barrels per day while declining investment affects production capacity across the group.

The policy conflict between OPEC+ and IEA — which has openly expressed disappointment at the cartel's inaction — came to a head last month when OPEC abandoned the agency as one of its data sources.

Original Note:

IEA Cuts Oil Demand Forecast as China Reimposes Lockdowns (1)

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