And it wasn’t just a minor tweak from the Paris-based agency. It revised oil demand higher for this year by a whopping 520,000 barrels a day, with most of that rolled forward into 2023 as well. 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 outlooks from the three sets of analysts and put them in their historical context. The IEA’s revision sets its new demand number for 2022 roughly halfway between those of the other two agencies. It also brings its outlook pretty much back to where it saw things in March. So, although the IEA’s revision was big, it’s not out of line with others.
The other noticeable feature in the forecasts is that oil demand growth is disappearing fast, as the chart below illustrates. Global oil demand grew year on year by about 5 million barrels a day in the first quarter of the year — all three sources agree on that — but that increase is now evaporating.
That’s not entirely unexpected when you consider year on year comparisons. Oil demand at the start of 2021 was still adversely affected by the Covid pandemic, so a rebound at the beginning of this year was entirely reasonable. Then economic activity and travel eventually picked up later in 2021, so we would expect demand growth in the corresponding quarters of 2022 to ease.
It’s also worth looking in more detail at why the IEA boosted its demand forecast. It pins the revision on two factors.
It sees increased demand for oil in power generation, particularly in the Middle East, where demand for electricity soars to keep air conditioners running full blast in the summer. Like 2021, this year has been hot. Daily temperature highs in Riyadh, Saudi Arabia have averaged more than 43 degrees Celsius (109 degrees Fahrenheit) since the start of June and aren’t expected to fall much before October.
While this oil use in the Middle East will support demand for a while, it’s not likely to sustain it into the cooler months. Europe may be different. The IEA notes increases in the use of oil in power generation in Portugal, Spain and the UK, as well as in Japan.
Oil has become attractive as an alternative fuel because gas prices have soared. But Europe is rapidly replenishing its natural gas stockpiles ahead of winter, with injections to storage running about nine weeks ahead of last year. And that’s with flows from Russia already severely curtailed. Analysts at Standard Chartered Plc see President Vladimir Putin’s gas weapon blunted by the inventory build, suggesting that Europe could soon be in a position to get through winter “comfortably” without Russian gas.
More natural gas would reduce pressure on oil demand as an alternative. European Union countries finally reached a political agreement to cut gas use by 15% through next winter. The more they adopt aggressive energy-saving measures now, the less difficult the coming months will be. The problem is, contingency plans for reduced gas and power supplies to industry this winter will keep stoking demand for oil as long as fears of possible cuts remain.
But that additional demand will come up against a deteriorating economic outlook. If soaring prices for fuel, food and just about everything else trigger a recession, as many analysts fear, the reduced 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 Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Centre for Global Energy Studies.
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