Divergent forecasts for oil markets reflect deep uncertainty

The OPEC+ countries have indicated they don’t have much spare capacity (only Saudi Arabia and the United Arab Emirates can boost production) and many producers are struggling to even meet their current quota. Currently, OPEC+ produces 2.7M b/d below its official target. Therefore, it is non-OPEC production that needs to pick up the slack. The IEA expects more output from the US, Canada, Brazil and Guyana to make up for most of the additional oil that is needed. OPEC+ output is expected to remain flat or slightly down as increases in core OPEC outputs are not expected to compensate for the decline in Russian production. 

This could become a problem. Both the IEA’s and OPEC’s forecasts suggest a potential shortfall in supply next year. Obviously, a tightening oil market would drive up prices and could lead to demand destruction. Alternatively, pressure could mount to relax the sanctions on Russia or try to implement a price cap instead that will keep more oil flowing.

While the IEA and OPEC both expect demand growth in 2023, they have different views on the second half of 2022, and in their reports, they cite several drivers underlying their forecast.

Compared with last month, the IEA lowered demand growth expectations for H2 2022 for the Americas, as sharply higher prices are having an impact on gasoline demand in the US. At the same time, they increased European oil demand growth by 200-300,000 b/d as the IEA expects that extremely high prices and potential shortages of natural gas will lead to significant gas-to-oil switching in the EU.

OPEC takes a different view. They worry about the economic impact of the Russian invasion of Ukraine, high global inflation and coronavirus lockdowns in China. OPEC reduced their forecast for global oil demand this quarter by 720,000 b/d.

Against this backdrop, the largely symbolic 100,000 b/d OPEC+ production hike may be less of an issue. However, the key is where Russia’s output will go in the second half of the year. OPEC only expects a 400,000 b/d reduction in Russian output over the next six months. In contrast, the IEA expects Russian production to decline by 1.2M b/d as the EU implements its ban on seaborne oil purchases.

The tanker industry will need to keep an eye out on the developments in the oil markets. The outlook is very uncertain, but at the moment that does not seem to have a negative impact on freight rates.

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