DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined early Thursday after the International Energy Agency downgraded its 2022 global demand projections for the second month in a row, citing expanded lockdowns in China and economic slowdown in the United States that is expected to fend off a near-term supply deficit.

In its monthly Oil Market Report released Thursday morning, IEA forecasted global oil demand growth would slow to 1.9 million barrels per day (bpd) in the second quarter, down from 4.4 million bpd seen in the first three months of the year. For the second half of the year, global oil consumption would deteriorate further to a mere 490,000 bpd, pressured by a more tempered economic expansion and higher prices.

"Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023," said IEA this morning. "Extended lockdowns across China where the government struggles to contain the spread of COVID-19 are driving a marked slowdown in the world's second largest oil consumer."

For the year, global oil demand is expected to average 99.4 million bpd, down 1.2 million bpd compared to IEA's February forecast made before the war in Ukraine. Slowing demand growth coupled with expansion in output from Middle East OPEC+ producers will offset over time an acute supply deficit created by the loss of Russian production on the global oil market, said the Paris-based agency.

Russia shut in nearly 1 million bpd in April, driving down world oil supply by 710,000 bpd to 98.1 million bpd.

"Despite mounting international pressure and falling oil production, Russian exports have so far held up by and large. But now major trading houses are winding down deals ahead of a May 15 deadline to halt all transactions with state controlled Rosneft, Gazprom Neft and Transneft," said IEA.

IEA forecast that after a decline of nearly 1 million bpd in April, Russian production losses could expand to around 3 million bpd during the second half of the year. According to IEA, Russian losses would more than offset higher output in Middle East OPEC+ producers and elsewhere, with worldwide production seen rising by 3.1 million bpd from May through December.

In the United States, however, critically low levels of petroleum fuel stocks continue to exacerbate market tightness heading into the summer months. Gasoline inventories currently stand at their lowest point this year at 225 million barrels (bbl) after plunging more than 3 million bbl last week, while stockpiles of distillate fuels fell to their lowest level in 17 years at 104 million bbl.

At the current consumption rate, U.S. distillate stocks could cover just under four weeks of demand compared to 35 days in the same period last year. Distillate inventories sustained a destocking pattern for the fifth consecutive week through May 6, sending stockpiles 23% below the five-year average. Demand for both gasoline and distillate last week fell domestically, but inventories still shrunk as U.S. refiners are sending more product abroad to replace Russian exports.

Dwindling fuel inventories in the United States further fanned fears over sky-high inflation that once again rose more than expected in April. Bureau of Labor Statistics on Wednesday reported the Consumer Price Index climbed 8.3% in April, more than an 8.1% market estimate, and near the highest level in more than 40 years. Core CPI, which excludes volatile prices for food and energy, also came in higher than expected, rising 6.2%.

Shelter costs, which comprise about one-third of the CPI, rose at their fastest pace since 1991. The price gains also mean workers continued to lose ground. Real wages adjusted for inflation decreased 0.1% on the month despite a nominal increase of 0.3% in average hourly earnings. Over the past year, real earnings have dropped 2.6% even though average hourly earnings are up 5.5%.

This data doesn't bode well for gasoline demand in the United States that historically correlates closely with discretionary income available for the American consumer and health of the labor market. Even though the jobs market is still incredibly tight and there are a record number of job openings, that doesn't mean the American consumer has more money to spend on road trips and vacations this summer.

Near 7:30 a.m. EDT, NYMEX June West Texas Intermediate fell $1 bbl to $104.70 bbl, and Brent crude declined to $106.33 bbl, down $1.17. NYMEX June RBOB futures slipped 0.88 cents to $3.6752 gallon, and the front-month ULSD contract plunged 12.24 cents to $3.8290 gallon.

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