And it wasn’t just a small tweak from the Paris-based agency. He revised up oil demand for this year by a whopping 520,000 barrels per day, most of which has also been pushed into 2023. On the face of it, that’s very bullish for oil.
But there are plenty of reasons to be cautious.
First, let’s compare the actual outlook of the three groups of analysts and place them in their historical context. The IEA’s review sets its new application number for 2022 about halfway between those of the other two agencies. He’s also bringing his outlook back to roughly where he saw things in March. So, although the IEA review was important, it is not out of step with the others.
The other notable feature of the forecast is that oil demand growth is rapidly waning, as shown in the chart below. Global oil demand rose year on year by around 5 million barrels per day in the first quarter of the year – all three sources agree on this – but that increase is evaporating.
That’s not entirely unexpected considering the year-over-year comparisons. Oil demand at the start of 2021 was still being penalized by the Covid pandemic, so a rebound at the start of this year was entirely reasonable. Then, economic activity and travel finally picked up later in 2021, so we expect demand growth in the corresponding quarters of 2022 to slow.
It is also worth taking a closer look at why the IEA has increased its demand forecast. He pins the review on two factors.
He sees an increase in demand for oil in power generation, especially in the Middle East, where the demand for electricity is skyrocketing to keep air conditioners running full blast in the summer. Like 2021, this year has been hot. Daily high temperatures in Riyadh, Saudi Arabia, have averaged over 43 degrees Celsius (109 degrees Fahrenheit) since the start of June and are not expected to drop much until October.
Although this oil consumption in the Middle East will support demand for some time, it is unlikely to sustain it during the colder months. Europe can be different. The IEA notes an increase in the use of oil in electricity generation in Portugal, Spain and the United Kingdom, as well as in Japan.
Oil has become attractive as an alternative fuel because gas prices have skyrocketed. But Europe is rapidly rebuilding its natural gas stocks ahead of winter, with injections into storage operating about nine weeks before last year. And that is with flows from Russia already severely reduced. Analysts at Standard Chartered Plc see President Vladimir Putin’s gas weapon blunted by stockpiling, suggesting Europe may soon be able to winter “comfortably” without Russian gas.
More natural gas would reduce pressure on demand for oil as an alternative. The countries of the European Union have finally reached a political agreement to reduce gas consumption by 15% until next winter. The more aggressive energy-saving measures they adopt now, the less difficult the months ahead will be. The problem is that contingency plans to cut gas and power supplies to industry this winter will continue to fuel demand for oil as long as fears of possible cuts persist.
But this additional demand will come up against degraded economic prospects. If soaring prices for fuel, food and just about everything else trigger a recession, as many analysts fear, the reduction in economic activity could quickly send oil demand in the opposite direction.
So I’m keeping my bullishness on oil prices in check – for now.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Julian Lee is oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Studies.
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