The International Energy Agency said Wednesday that Covid lockdowns in China were likely to sharply cut the growth in demand for oil in that country, potentially easing a supply crunch caused by sanctions on Russia.
The agency said that the darkening economic picture in China, the world’s largest oil importer, was the main reason it was trimming its overall forecast of demand growth for oil this year to just 1.9 million barrels a day, a cut of about 40 percent since December. Last year, demand increased by 5.6 million barrels a day as the world recovered from the pandemic.
The agency’s new prediction may be a sign of expanding energy market concerns. So far, such worries have largely focused on the potential of a loss of oil and gas supplies from Russia, one of the world’s largest producers and exporters, because of sanctions over the war in Ukraine. There is now growing awareness that high energy prices and other ripple effects from the war will sap global economic growth, cutting energy demand.
“It just seems to me there are an awful lot of macroeconomic headwinds that could weigh on oil demand during the course of the year,” said David Fyfe, chief economist at Argus Media, a commodity research firm.
In their monthly oil market report, analysts at the Paris-based agency also noted that many forecasting institutions were revising down their economic assumptions as the war in Ukraine “continues to strongly impact commodity flows, prices, inflation and currencies.”
The agency also said that the world shipping container trade appeared to have contracted significantly since the beginning of the war because of sanctions on Russia and increased uncertainty.
About 700,000 barrels a day of Russian oil production had so far been taken offline because of a lack of buyers, the report estimated. The agency said that this number could double in April and again in May, reaching close to 3 million barrels a day taken off the market, amounting to about 30 percent of Russia’s output and 3 percent of global supplies.
In an indication of the problems the Russian industry faces, Vitol, one of the world’s largest energy trading firms, has decided to phase out dealing in oil of Russian origin by the end of the year.
But expanded output from other oil producers will help fill that gap. The agency said that world output was expected to increase by 3.9 million barrels a day by the end of the year as OPEC producers like Saudi Arabia and the United Arab Emirates continued a gradual ramp up, and production in the United States and elsewhere increased.
The analysts said that lower demand, combined with expected supply increases from the Middle East and the United States, “should prevent a severe deficit from developing.”
The Russia-Ukraine War and the Global Economy
The agency also said that the massive releases of strategic stocks of oil from the United States and other countries, which the agency is helping to coordinate, should also help buffer the market.
Prices have moderated somewhat after Brent crude, the international benchmark, leaped to over $123 a barrel in the early stages of the war but remain elevated. On Wednesday futures were selling for close to $106 a barrel, up about 1 percent.
The analysts conceded that the “the outlook is mired in uncertainty” and that oil in storage tanks was dwindling rapidly as of February, a situation that could lead to further price rises.
