In the previous few weeks oil markets have been absorbing wild swings. Overall in the last three months oil prices have plunged about 25 percent from its recent peaks. One of the factors is that at a fundamental level, post Covid, there was not any drastic changes but the geopolitical risk premium was at play as Russia invaded Ukraine. The markets have become desensitized to that conflict, however, and as I explain in one of my articles here that is not the right approach to look at it – the war can’t go on perpetually, it has to end, and when it does, most likely and unfortunately, there will be a winner and loser. Escalation is possible. Similarly, 5th of December, the Russian oil embargo will be implemented. I tend to believe we might see another rally by then if even everyone knows it already. However, one of the most important questions right now is that of oil demand. Despite recessionary fears looming and oil prices falling as a consequence, there have not been any real or proper forecasts of a downturn in oil demand.
On the contrary, some see oil demand strengthening. IEA says that oil demand will rebound next year as it believes the slowdonw in global growth will only be shortlived. Both OPEC and IEA sees oil demand to rise by 2 to 3 percent this year and next. Per the IEA, oil demand growth will be 2.1 mbpd mainly due to hopes vis a viz improvement in Chinese economy.
The Russian oil embargo is expected to bring down its oil production to 9.5 mpd by February 2023 – a 1.9 mbpd drop as compared to 2022, the IEA report further highlighted.
OPEC and IEA are optimistic in oil demand recovery. OPEC’s Secretary General Haitham Al Ghais speaking with Reuters said that there might be a slowdown in 2023 but it won’t be “lower than historical terms”. The oil cartel expects oil demand to rise by 3.1 mbpd in 2022 and 2.7 in next. Joining this optimistic chorus is Goldman Sachs that sees a 2 mbpd increase in demand next year despite signs of recession.
In regards to China, there is a slight chance that its oil demand will increase as it has allowed new fuel export quotas to refiners in order to spur economic growth. Refiners in China have applied for 15 million tons for fuel exports as reported by Bloomberg.
All in all, there remains an absence of oil demand concerns in the news. However, “absence of evidence is not the evidence of absence”. If global recession hits the economy really hard, we will see a fall in oil demand as many developing countries are already grappling with fiscal and climatic issues.
Time will tell.
