When you take a look at the most recent estimates from the three major oil organizations, you might be excused for believing they were coming from different planets.
The monthly outlooks from the Organization of the Petroleum Exporting Countries (OPEC), the International Energy Agency, and the United States Energy Information Administration offers dramatically different depictions of the effect of Russia’s conflict in Ukraine. If you were to read the OPEC report, you’d be hard pushed to believe anything occurred. The term “invasion” does not occur once in the 90-page paper, while the word “war” appears just once. The phrase “Ukraine crisis” is their preferred descriptor.
There is a possibility that the group’s reluctance to address the magnitude of the disruption that could result from Russia’s aggression stems from years of effort on the part of OPEC to cultivate relations with Moscow and persuade Russia to participate in production cuts within the larger OPEC+ group. However, it makes the company’s oil market projection seem a little out of date.
While the Organization of the Petroleum Exporting Countries (OPEC) acknowledged that the effects of the war, if they continue, would have a negative impact on economic activity in 2022, they actually made a small upward revision to their global oil demand forecast for the year, compared to their forecast in February.
The EIA did not significantly lower its forecast for global oil demand, though it does note in its report that the estimates are based on economic forecasts that were completed before the invasion took place and that the outlook will “depend on how economic activity and travel respond to recent and any potential future events and sanctions,” among other things.
The International Energy Agency, on the other hand, believes that a combination of sanctions and high oil prices, as well as their influence on wider inflation, will have a significant and very immediate impact on global oil consumption. It downgraded its prediction for demand in 2022 by 950,000 barrels per day, with the most significant impact expected in the second and third quarters of the year, respectively. According to the Paris-based organization, rising oil prices will lower demand by 400,000 barrels per day, with the remaining 400,000 barrels per day coming from less economic activity.
It reduced its prediction for Russian oil consumption this year by 435,000 barrels per day, citing a severe decline in GDP coupled with interruptions in aviation, which have resulted in the cancellation of the vast majority of foreign flights from the country. The outlook for numerous other big oil users has been downgraded by approximately 1% as well.
On the supply side, there are also significant disparities in the outlook for the future.
In its latest prediction, the Organization of the Petroleum Exporting Countries (OPEC) did not factor in the invasion’s consequences. This is in sharp contrast to the International Energy Agency’s (IEA) downward revision of its global oil supply forecast for the remainder of 2022 by 2.8 million barrels per day. As a result of “a decline in domestic demand combined with a wider customer-driven voluntary embargo while sanctions drive away even more consumers,” the report predicts that Russian oil output would decrease by as much as 3 million barrels per day starting in April.
With the exception of one or two Russian refineries that have reduced their crude deliveries, there is little immediate evidence of the significant decline in production predicted by the International Energy Agency (IEA), despite widespread self-sanctioning of Russia’s oil exports by major oil companies and refiners. As of today, cargoes are still being loaded at Russia’s export facilities, which is good news.
Because of Russia’s involvement in Ukraine, the oil supply may not be disrupted; severe discounts and a tight market may be sufficient to keep Russian barrels flowing, even if they must be transported farther to find interested customers. Furthermore, as all three agencies have pointed out, there are significant uncertainties. Demand will undoubtedly be affected by higher crude oil prices (over $100 per barrel), rising inflation, and reduced economic activity in Russia, factors that will be taken into consideration by all of the agencies in their subsequent forecasts.