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Oil Traders Should Consider Global Demand Forecasts From IEA And OPEC

Published 09/15/2022, 05:35 AM
Updated 07/09/2023, 06:31 AM

Longtime readers of this column know that I do not put much faith in models or forecasts. Indeed, the more complicated the model and the longer term required by the prediction, the more inaccurate it will be. However, markets do react to forecasts, and that is why it is relevant for traders to know what different organizations predict in terms of oil supply and demand.

Recently, both OPEC and the International Energy Agency (IEA) issued new market forecasts for the fourth quarter of 2022 and 2023. Below is a look at their global oil demand growth forecasts and their significance for the market.

International Energy Agency

The IEA revised its current forecast for 2022 demand growth down by 110,000 bpd, because it expects that oil demand growth will essentially come to a halt in the fourth quarter of this year. The agency foresees Covid lockdowns in China bringing the Chinese economy to a standstill and economic slowdowns in OECD nations (especially Europe) hurting oil demand. This forecast was largely seen as the culprit behind the drop in oil prices on Wednesday.

However, the IEA believes the Chinese slowdown will only be temporary, as it expects a major reversal for China in 2023. The agency predicts that Covid restrictions will be lifted and that China’s oil demand will pick up as the economy grows. This, coupled with a boom in air travel that will boost jet fuel demand will result in a 2.1 million bpd growth in global oil demand in 2023, according to the IEA.

Notably, the IEA forecast does not see oil demand growth returning in the OECD nations. Instead, all of the growth in its forecast is concentrated in China while the OECD limps along, hobbled by sanctions against Russian energy products.

Because so much of the IEA’s forecast depends on the Chinese economy, traders should keep a close eye on China to see whether this forecasted growth can be taken seriously. If China continues to institute its “zero-Covid” policies that periodically lockdown its economy and drive oil demand down, then we may not see 2.1 million bpd of oil demand growth in 2022.

There is also an argument that China believes it is beneficial to continue locking down various cities—using Covid as an excuse—while commodity prices are higher than China would like. It will be interesting to see whether lower commodity prices coincide with an anticipated relaxation of China’s “zero Covid” policy or not in 2023.

Organization of Petroleum Exporting Countries

OPEC released its Monthly Oil Market Report on Tuesday, and, in contrast to the IEA, it did not revise its oil demand forecast. OPEC kept its oil demand growth forecast for 2022 stable. It acknowledged that although many nations are facing high inflation, oil demand has remained steady. OPEC highlighted certain indicators, such as retail spending in the U.S. and Europe, as signs that economic activity is holding up better than expected.

OPEC forecasts a 2.7 million bpd increase in global oil demand in 2023, which would bring global oil demand to 102.73 million bpd, finally surpassing global oil demand from 2019. OPEC is not concerned about a Chinese economic slowdown in the fourth quarter of 2022 and expects that the market will see less geological risk, reductions in Covid restrictions and “still-solid performance in major consuming countries.”

Perhaps OPEC’s report paints an overly optimistic view of the economy in 2023. It may be hard to reconcile OPEC’s view with some of the recent economic indicators such as inflation and corporate layoffs in the United States, energy prices and energy rationing in Europe. But traders must pay attention to this OPEC forecast, because OPEC countries will consider it at their next meeting. It suggests that production cuts would not be warranted. OPEC countries consider a variety of data and forecasts during their meetings, but the organization’s own forecasts are significant.

Latest comments

Did the Author mean "GEOPOLITICAL risk", rather than "geological"?
Great, thanks for the article 💯
Thank you for the article.
OPEC+ can change their tune any time they decide it is necessary.
Look at the supply side, not only the demand. Demand will be weak, the world economy, OECD countries more the others, is in a terrible shape; is the supply shrinking or increasing?
with COVID declared as on to end,by WHO, a big chunk unvaccinated will also start travelling.
gold
so all the oil demand growth is coming from China. But seems China's real estate have serious problems. so if property prices falls then chinese people will feel less rich and will travel less not more
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