The International Energy Agency said on Wednesday that COVID-19 shutdowns in China are likely to sharply reduce oil demand growth in that country, potentially easing a supply crunch caused by sanctions against Russia.
The bleak economic picture in China, the world’s largest oil importer, was the main reason for reducing its overall forecast for oil demand growth this year to just 1.9 million barrels per day, the agency said, a cut of about 40 percent since December. . Last year, demand increased by 5.6 million barrels per day as the world recovered from the pandemic.
The agency’s new forecast may be a sign of expanding energy market concerns. So far, these concerns have largely centered on the potential loss of oil and gas supplies from Russia, one of the world’s largest producers and exporters, due to sanctions due to the war in Ukraine. There is now a growing awareness that high energy prices and other effects of war will dampen global economic growth, and reduce energy demand.
“It seems to me that there are a huge number of macroeconomic headwinds that could affect oil demand during the year,” said David Fife, chief economist at Argus Media, a commodities research firm.
In their monthly oil market report, analysts at the Paris-based agency noted that several forecasting firms were revising their economic assumptions as the war in Ukraine “continues to strongly impact commodity flows, prices, inflation and currencies.”
The agency also said that global shipping container trade appears to have shrunk significantly since the start of the war due to sanctions against Russia and increasing uncertainty.
The report estimated that about 700,000 barrels per day of Russian oil production has so far been shut down due to a lack of buyers. That number could double in April and again in May, the agency said, to nearly 3 million barrels per day, which represents about 30 percent of Russia’s production and 3 percent of global supplies.
In a sign of the problems faced by the Russian industry, Vitol, one of the world’s largest energy trading companies, decided to phase out dealing in Russian-origin oil by the end of the year.
But increased production from other oil producers will help close this gap. The agency said that global production is expected to rise by 3.9 million barrels per day by the end of the year as OPEC producers such as Saudi Arabia and the United Arab Emirates continue to gradually increase and increase production in the United States and elsewhere.
Analysts said that lower demand, along with expected increases in supply from the Middle East and the United States, “would prevent a sharp deficit from occurring.”
The Russo-Ukrainian War and the Global Economy
The agency also said the massive releases of strategic oil stocks from the United States and other countries, which the agency helps coordinate, should also help protect the market.
Prices fell somewhat after Brent crude, the international benchmark, jumped to more than $123 a barrel in the early stages of the war but remained high. On Wednesday, futures were sold at nearly $106 a barrel, up about 1 percent.
Analysts acknowledged that “the outlook is mired in uncertainty” and that oil in storage tanks is dwindling rapidly as of February, a situation that could lead to further price hikes.