Lower crude demand, rising output to fend off acute supply deficit – IEA

MADRID (ICIS)–Despite lower output from Russia in April, the world’s crude oil supply is meeting demand as China’s economy slows down, the International Energy Agency (IEA) said on Thursday.

Russia shut in nearly 1m bbl/day in April, driving down the world’s supply by 710,000 bbl/day to 98.1m bbl/day, said the IEA.

“Over time, steadily rising volumes from Middle East OPEC+ [members] and the US, along with a slowdown in demand growth [due to China lockdowns slowing its economy], is expected to fend off an acute supply deficit amid a worsening Russian supply disruption,” it added.

The IEA expects Russian supply to worsen as the country’s isolation “deepens” as the EU and the G7 group of richest nations contemplate tougher sanctions for its invasion of Ukraine in February.

These sanctions could include a full phase-out of oil imports from Russia.

“If agreed, the new embargoes would accelerate the reorientation of trade flows that is already underway and will force Russian oil companies to shut in more wells … Amid the widening supply and demand uncertainties, oil market volatility remains rife, but prices are trading in a lower and narrower $10/bbl range above $100/bbl,” said the IEA.

Crude oil Brent futures, the international reference, stood in Asian morning trading at $106.30/bbl.

But the “rapid early-May advances” on the sixth round of EU sanctions for Russia drove renewed price tensions, said the IEA, with high crude prices and “exceptional product cracks” fuelling inflation.

Despite mounting international pressure and falling oil production, Russian exports have so far held up by and large, according to IEA figures, but the situation could quickly change from now.

“Major trading houses are winding down deals ahead of a 15 May deadline [emanating from the sanctions imposed on Russia] to halt all transactions with state-controlled Rosneft, Gazprom Neft and Transneft,” said the IEA.

“Following a supply decline of nearly 1m bbl/day in April, losses could expand to around 3m bbl/day during the second half of the year.”

NAPHTHA DEMAND SLUMPS
In the petrochemicals industry, naphtha-dependent producers globally have been cutting run rates after prices for that commodity shot up in March, which “triggered rate cuts and feedstock shifts on an even greater scale than forecast in April’s [Oil Market] Report”, said the IEA.

Globally, naphtha demand shrank by 310,000 bbl/day in March, year on year, the first such fall since April 2020, said the IEA, which compared with an average year-on-year increase of 540,000 bbl/day during the previous six months.

In contrast, intakes of liquefied petroleum gas (LPG) rose by 820,000 bbl/day, with flexible steam cracker operators increasing their intake.

“Naphtha demand slumped by 190,000 bbl/day in March. This reflected a combination of lower operating rates at Chinese steam crackers, with tighter margins and supply chain issues, alongside a switch by flexible cracker operators in favour of LPG consumption as margins based on the lighter feedstock became more favourable,” said the IEA.

“As in other countries, we expect that petrochemical producers will maximise the share of LPG feedstock used throughout the year.”