The market take on last week’s separate reports was largely that the Organization of the Petroleum Exporting Countries cut its 2022 forecast for oil demand growth for a third time since April, while the IEA raised its estimate.
This is an entirely accurate assessment, but as usual the devil is in the detail, and the two reports show remarkable similarities in the overall picture being presented.
OPEC said in its monthly report on Aug. 11 that it expected 2022 oil demand to rise by 3.1 million barrels per day (bpd), or 3.2%, which was a decline of 260,000 bpd from its prior forecast.
The IEA in its report on the same day raised its forecast by 380,000 bpd to 2022 oil demand growth of 2.1 million bpd.
While these headline-grabbing numbers do look different, the overall number for 2022 global oil demand is now much closer, with OPEC expecting 100.03 million bpd and the IEA forecasting 99.7 million bpd.
That’s a difference of just 330,000 bpd, which in the broader context is largely insignificant.
The gap between the adviser to industrialised nations and the biggest oil producing group on 2022 global demand growth has also been narrowing in recent months, having been as wide as 1.1 million bpd at the time of their April reports.
There are similar dynamics driving the convergence of views, with both August reports pointing to an ongoing recovery in top importer China and increases in using crude and fuel oil for power generation amid extremely high prices for coal and natural gas after Russia’s Feb. 24 invasion of Ukraine.
“Soaring oil use for power generation and gas-to-oil switching are boosting demand,” was how the IEA characterised oil demand growth.
The OPEC report talked of “still healthy growth includes the recently observed trend of burning more crude in power generation”.
What is less certain is whether the trend of burning crude and fuel oil for power generation is going to be a sustained trend, or whether it’s a short-term phenomenon that will fade.
Certainly, much of the use of oil for power generation is a seasonal factor in the northern hemisphere, especially in oil-producing and hot climate countries such as Saudi Arabia.
But for oil to become a sustained factor in power generation it would take thermal coal prices remaining at near record levels, as well as actual shortages of natural gas in Europe, as opposed to the current fear of shortages and concern over Russian pipeline flows ahead of the northern winter.
One thing both the IEA and OPEC are fairly clear on is that the decline in supply of Russian oil and refined products has not been that dramatic, although the risk is that it becomes more of a factor in coming months.
Russian coal and liquefied natural gas (LNG) exports are also holding close to pre-invasion levels, meaning that the actual disruption to global markets is related to the shifting of flows rather than a loss of volumes.
What is not disputed is the massive price increases for energy, especially in Europe, which has sparked inflation and monetary tightening.
It is perhaps surprising that both the IEA and OPEC are relatively sanguine about the global economic outlook, even though inflation is at three-decade highs and several major industries, especially in Europe are facing energy-related curtailment.
While consumer demand may be holding up, sustained inflation, high energy prices and tighter monetary policy will likely sap spending and investment in the global economy before too long.
In effect, the IEA and OPEC, in forecasting higher oil demand growth this year and in 2023, are betting that the current problems around inflation and Russian supplies will be short-lived and the world economy will enjoy strong growth next year.
(The opinions expressed here are those of the author, a columnist for Reuters.)