IEA expects oil production in Russia to fall by 30%
Due to Russia’s special military operation in Ukraine and related disruptions in oil supplies, global demand for oil in 2022 will increase by only 2.1 million barrels per day (bpd), according to a March report by the International Energy Agency ( IEA). In February, the IEA expected demand to grow by 3.2 million bpd. Global demand, according to the agency, in 2022 will be 99.7 million bpd (the February report said 100.6 million bpd).
“The consequences of the potential loss of Russian oil exports to world markets cannot be underestimated. Russia is the world’s largest exporter, supplying 8 million bpd of crude oil and petroleum products to consumers around the world, ”IEA analysts said. Due to the situation in Ukraine, oil production in Russia, according to the agency, in 2022 will fall by 3 million bps to 7.1 million bps (in February, the agency estimated production in Russia at 10.1 million bps ).
According to analysts, in January, the total oil reserves of OECD countries fell by 22.1 million barrels to 2.6 billion barrels, the lowest level since April 2014. The industry’s reserves covered 57.2 days of forward demand, which is 13, 6 days less than in 2021. According to preliminary data provided in the survey, in February, stocks in the United States, Europe and Japan fell by another 29.8 million barrels.
IEA analysts also note that currently Russian oil is supplied to the world market only under contracts concluded before the start of the military operation in Ukraine on February 24. At the same time, traders are beginning to abandon Russian oil, according to the agency’s report.
The IEA emphasizes that only Saudi Arabia and the UAE have free production capacity that can compensate for the decline in oil production in Russia. Analysts estimate that if sanctions are lifted from Iran, oil exports from the country could grow by 1 million bpd within six months. In addition to the participants in the OPEC + deal, oil supplies could increase the United States, Canada, Brazil and Guyana.
Analysts also note that volatility in the oil market will remain in the medium term. According to the ICE exchange, on March 16 the price of the May (nearest) futures of the North Sea reference grade Brent was $ 102 per barrel, the American WTI (April futures) – $ 99 per barrel. Energy prices, including oil, began to rise in the second half of 2021. In 2022, the peak of price growth was observed on March 8, when the price of Brent exceeded $ 127 per barrel.
The IEA builds its forecast on the basis of preliminary industry data and its own assessment of the market situation, which is currently not confirmed by official statistics, said Nikita Blokhin, a senior analyst at Alfa Bank. The expert stressed that the growth of average daily production in Russia in the first half of March amounted to 0.5% in February, which suggests that the growth rate observed at the end of the previous month. Despite the fact that the decline in demand for Russian oil on the European market will somehow be reflected in the growth rate of production in the coming months, Alfa-Bank is in no hurry to revise current forecasts. Blokhin also added that contrary to the IEA’s forecasts, OPEC maintains a cautiously positive view of the dynamics of the oil market.
In an analytical report dated March 15, OPEC confirmed the forecast of oil production in Russia at 11.76 million bpd in 2022, pointing to significant risks of its revision. In addition, OPEC maintained the estimate of the growth rate of oil demand in 2022 at 4.2 million bpd, emphasizing the uncertainty due to the geopolitical situation. The IEA reduced its forecast for global demand growth by 1.1 million bps.
3 million bpd, which, according to IEA estimates, will reduce production in Russia in 2022, correspond to the volume of Russian oil exports to Europe, said the director of the National Energy Security Fund Konstantin Simonov. He stressed that there is a shortage of supply on the market now, so even if Russian oil exports to Europe stop completely, supplies will be redirected to Asia, in particular, to China and India. “Even in the event of a loss of the European market, production in Russia will not be reduced by 3 million bpd, there are no grounds for this now,” Simonov concluded.
According to Blokhin, there is indeed significant uncertainty in the market regarding the extent of the impact of current geopolitical events on the hydrocarbon market. The fate of the energy transition remains unclear, the expert continues. He reminded that the IEA had previously been seen publishing a number of bold forecasts, which were ambiguously accepted by the expert community.
Blokhin stressed that given the speed with which the introductory changes in the background of recent events, it is now almost impossible to soberly assess the potential for changes in the balance of supply and demand in the oil market. “Even if we allow a significant decline in demand for Russian oil in the short term, this trend is unlikely to continue on the horizon for several months in a shortage of motor fuel,” – said the expert. “Urals oil consignments, previously focused on European markets, can find a buyer in Asia at a significant discount, which will lead to changes in the structure of trade flows and production processes of individual countries,” Blokhin continues.