Oil Adds to Gains as IEA Warns of Near-Term Supply Deficit

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange continued higher in early trade Wednesday, lifting the international crude benchmark above $106 barrel (bbl) after the International Energy Agency estimated supply growth from the Organization of the Petroleum Exporting Countries and partners outside of the cartel led by Russia as well as U.S. shale producers fell short of expectations at the start of the year, exacerbating a near-term deficit on the global oil market created by the loss of Russian production.

Some 700,000 barrels per day (bpd) of Russian oil production has been shut-in so far in April, according to estimates from Paris-based IEA, as crude exports continue to fall under pressure from international sanctions and customer-driven embargoes. The agency assumes these losses will grow to average 1.5 million bpd for the month with more buyers shunning Russian barrels as storage tanks there quickly fill up. From May, those losses could accelerate to 3 million bpd and persist through the end of 2022.

"While some buyers, most notably in Asia, increased purchases of sharply discounted Russian barrels, traditional customers are cutting back. For now, there are no signs of increased volumes going to China, where refiners have cut runs as a recent surge in COVID cases and new restrictions have dented oil demand," said IEA in its monthly Oil Market Report released Wednesday morning.

Commerzbank estimates China's oil demand fell by 1.2 to 1.5 million bpd from February to March due to COVID shutdowns.

Elsewhere, OPEC again underdelivered on its monthly production increase, according to IEA estimates, increasing collective output by a mere 40,000 bpd in March compared with a planned 400,000 bpd hike, while 1.5 million bpd below its target. Output from non-OPEC+ producers, most notably the United States, also fell short of expectations at the start of the year. Non-OPEC output is now seen growing by 2 million bpd in 2022, 100,000 bpd lower than projected in last month's forecast.

On the demand side, IEA lowered its 2022 global consumption forecast by 260,000 bpd from last month's report, and demand is now expected to average 99.4 million bpd. COVID-19 lockdowns in China combined with slower-than-expected economic growth in developing countries contributed to downward revisions in this month's IEA report.

Downbeat demand forecast comes only a day after both OPEC and EIA downgraded their consumption forecasts through 2023, citing sluggish recovery in jet fuel and inflationary pressures across much of the world. OPEC shaved 500,000 bpd off global demand projections for this year for demand growth of 3.7 million bpd, mostly reflecting the downward revision in world economic growth expectations. EIA made a more aggressive call on demand destruction, cutting 2022 consumption expectations by 810,000 bpd from the previous month's outlook.

The sharp revisions in the outlooks come against a backdrop of surging inflation in the United States and elsewhere. Bureau of Labor Statistics reported Tuesday morning that the U.S. consumer price index climbed 1.2% from February to March, bringing the annualized rate of inflation to the highest point since 1982 at 8.5%. Rising consumer prices have been unrelenting, with six straight months of inflation above 6%, which is well above the Federal Reserve's 2% target.

Wednesday's gains in the oil complex came despite an American Petroleum Institute report that U.S. commercial crude oil inventories increased by a larger-than-expected margin for the week ended April 8, offsetting steep draws in gasoline and distillate fuel inventories. Data showed crude stocks surged 7.757 million bbl in the reviewed week, well above calls for a 600,000 bbl gain. Inventories at the NYMEX delivery point in Cushing, Oklahoma, posted a 375,000 bbl increase. Gasoline stockpiles plunged 5.053 million bbl in the week ended April 8, far surpassing estimates for a draw of 600,000 bbl. API data show distillate inventories dropped 4.961 million bbl, missing calls for stocks to have remain unchanged.

Traders now await official data from the EIA on tap for a 10:30 AM ET release.

Near 7:45 a.m. EDT, NYMEX May West Texas Intermediate futures advanced $1.55 to $102.13 bbl, and the ICE June Brent contract rallied $1.65 to $106.48 bbl. NYMEX May RBOB added 4.12 cents to $3.20 gallon, and May ULSD jumped 6.71 cents to $3.5306 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges