Muscat: Demand side concerns continued to haunt the oil market with prices once again going below $100 per barrel at the start of August-2022, according to a new report.

Crude oil prices reached pre-war levels after fears of recession resurfaced as demand outlook remained unclear, especially for the US and Europe, the Kuwait-based Kamco Invest said in its Oil Market Monthly Report August-2022.

The increase in interest rates last month further increased the probability of an economic slowdown as headline inflation in the US continues to remain high at 8.5 per cent in July-2022. The decision to increase output by the Organisation of Petroleum Exporting Countries (Opec), albeit marginally and the resumption of supplies from Libya also added to the downward pressure on crude oil, the report said.

However, the decline in crude oil prices as well as its volatility also came as a relief to crude oil importers across the globe that was demanding increasing output. This, in turn, is expected to partially offset demand growth concerns. Average gasoline prices in the US fell below the $4 per gallon mark for the first time since March 2022 and are expected to feed into near-term inflation which is expected to soften.

Furthermore, recent economic data from the US and China showed a positive picture.
Meanwhile, corporate executives highlighted uncertainty about an economic recession is causing them to remain cautious. Data from China and India showed positive demand signals backed by both economic recoveries as well as cheaper oil imports from Russia. Moreover, the gas-to-oil switch due to higher natural gas prices, especially in the European region, also supported the price of crude oil.

On the supply side, the 100,000 tonnes per barrel (tb/d) promised to increase by the Opec+ in its latest meeting did somewhat affected rising crude oil prices; however, oil sceptics were worried about the groups’ ability to increase output further, and the Kamco Invest report said. Nevertheless, the resumption of production in Libya came as a relief from soaring prices.

Moreover, the International Energy Agency (IEA), in its latest monthly report, showed that the ban on Russian crude imports had little impact on the country’s output.

On one hand, the shunning of Russian crude oil started to reflect in recent data and shifting market structure with Japan’s import of Russian crude oil falling to zero during June-2022 while Poland imported its first Abu Dhabi Murban oil during August-2022 as an alternative to Russian crude oil. On the other hand, China and India remained top importers of cheap Russian crude oil over the last few months.

On the production side, Opec crude oil production increased by more than 200 tb/d during July-2022 mainly led by higher production by middle eastern producers partially offset by a decline in production in Angola and Iran. Meanwhile, the latest Energy Information Administration (EIA) weekly report showed US crude oil production reaching a post-pandemic high of 12.2 million barrels per day (mb/d), the highest since April 2020. On the other hand, the crude oil rig count showed its first decline in 10 weeks in the latest data from Baker Hughes.

Oil prices
Oil futures reached six-month low levels at the start of August-2022 to reach $94.1 per barrel led by concerns about the impact of an expected economic recession globally on oil demand. The decline during the first week of the month was the highest since early April 2022. However, there were equal opposite factors that provided strong support to oil prices resulting in a decline in oil price volatility at slightly below the $100 per barrel mark, the Kamco Invest report said.

The softening of inflation was one of the key reasons followed by strong labour market data in the US. In addition, oil demand showed a positive trend in China and India.
India’s crude oil imports increased by 17.1 per cent during the April-June 2022 quarter following higher demand and discounts from Russia while China’s imports increased by one per cent during July-2022 from a 47-month low import level seen during June-2022.

The shutting down of pipelines following an oil leak incident in the Gulf of Mexico also supported prices last week. Moreover, the gains over the past two days also came after reports showed that water levels in the Rhine river, which is crucial for diesel and gasoil shipments from Russia to Europe, have fallen to record low levels affecting shipments of the refined products to Europe.

The decline in crude oil prices during July-2022 was reflected in average prices for the month. The average monthly Brent crude spot witnessed the second biggest decline since April 2020 at 8.8 per cent to reach $111.93 per barrel while the Opec crude basket witnessed the biggest decline since September 2020 at 8.8 per cent to average at $108.55 per barrel. Kuwait crude averaged at $111.1 per barrel after declining by 6.6 per cent from the previous month’s average.

World oil demand
The world oil demand growth forecast for 2022 was lowered by 0.3 mb/d to a growth of 3.1 mb/d with demand expected to average at 100.03 mb/d. The revision reflected a downward revision to demand estimates for the second half of 2022 owing to the resurgence of COVID-19 restrictions and geopolitical uncertainties.

However, an upward revision to demand data for the first half of 2022 due to better-than-expected demand from the main Organisation for Economic Co-operation and Development (OECD) countries partially offset the overall decline. Estimates from IEA showed a bigger revision of 380 tb/d to demand during 2022 citing natural gas to oil switch and higher demand from power generators due to the global heat wave as reasons for the revision. The agency expects extraordinary growth gains mainly in the Middle East and Europe regions partially offset by weakness in other regions.

World oil supply

Global liquids production recorded a monthly increase during July-2022 with preliminary data indicating a gain of 1.7 mb/d to reach an average of 100.6 mb/d. The monthly increase was mainly led by higher production in OECD Europe, Other Eurasia and Latin America by 1.1 mb/d partially offset by small declines in other regions.

Non-Opec liquids supply growth forecast for 2022 was once again kept unchanged by the Opec in its latest monthly report at 2.1 mb/d to average at 65.8 mb/d. For US production, the report said that output is expected to be lower than expected despite higher rig count and fracking activity mainly due to capital discipline by listed drillers who are focusing on lowering debt and increasing returns to shareholders.