INTERVIEW: IEA says high oil prices already damaging demand

Oil demand is already being hit by elevated crude prices but there are positive signals that consumption will hold up for now, the head of the International Energy Agency's oil market division Toril Bosoni told S&P Global Commodity Insights in an interview.

"We believe that current prices are already impacting economic growth and oil demand," Bosoni said on the sidelines of the S&P Global Executive Petroleum and Energy Conference held June 7 and 8.

She acknowledged demand destruction was already a feature of the oil market, but noted consumers are constantly adjusting their demand to energy prices, incomes, consumer confidence and the value of competing energies.

The IEA has been ratcheting down its 2022 oil demand forecast since the start of the year from 3.2 million b/d to 1.8 million b/d currently amid rising oil prices. The Dated Brent benchmark started the year below $80/b before climbing to a peak of close to $140/b in March on fears of reduced supply due to lost Russian barrels and tight oil product markets.

But despite the downgrades, which were also related to China lockdowns and the Russia-Ukraine war, Bosoni believes there are good reasons for demand to be resistant to triple digit oil.

Resistant demand

"Demand in the US and Europe has been holding up better than expected... High savings rates and strong pent-up demand for travel is providing an offset to the impact of surging fuel prices for now," Bosoni said.

Key jet, gasoline and diesel prices as assessed by S&P Global's Platts have risen by more than 50% since the start of 2022. With demand for summer travel likely to boost jet fuel demand, the US driving season set to guzzle gasoline and the summer use of air conditioners in the Middle East, pressure on oil products is going to get greater before it eases.

Across the barrel, the demand sensitivity to higher crude prices could shrink consumption by 680,000 b/d this year if Brent averages $110/b, a 7% increase on the baseline Dated Brent assumption of $102.7/b, according to S&P Global. A further rise to average $120/b in 2022 would sideline more than 1.3 million b/d of demand, according to S&P Global.

Transport fuels are set to feel the most pain from higher prices, with gasoline, jet and middle distillates making up 80% of the total oil demand impact, S&P Global estimates showed.

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Bosoni admitted the pandemic-related lockdowns in China "have had an even greater impact on demand than first thought," with the world's second-largest consumer having been a significant drag on the global demand outlook.

However, she sees Chinese demand recovering in the second half of the year, "accelerating manufacturing and exports, boosting bunker requirements and diesel demand."

Another reason for oil demand strength is that high natural gas prices are sustaining the switch from gas to oil. "Forward price curves don't suggest that this will change in the coming months," Bosoni pointed out.

The IEA also sees strong ramp-up in refining activity throughout the remainder of the year. "Our forecast shows throughput increasing 4.7 million b/d from a low point in April through to August and this will support crude demand and crude prices," Bosoni added.

Bosoni noted that low oil product inventories combined with ongoing maintenance and a lack in spare refining capacity "have only exacerbated the global fuel shortage". In response to the global shortage, some refiners are postponing non-essential maintenance, while running higher utilization rates through the summer, she said.