IEA warns of global oil supply shock with estimated 3 mil b/d of Russian supply shut in

The International Energy Agency on March 16 warned of a potential global oil supply shock, with an estimated 3 million b/d of Russian oil production likely to be shut in next month due to sanctions and buyers shunning the major exporter following its invasion of Ukraine.

In its monthly oil market report, the IEA lowered its estimate of demand growth for 2022 by 1.1 million b/d to 2.1 million b/d on the back of higher prices, reduced Russian consumption and the hit to aviation from Russian air space restrictions. It now sees 2022 demand at 99.6 million b/d.

"Surging energy and other commodity prices along with financial and oil sanctions against Russia are expected to depress world GDP and oil demand," it said.

However, it predicted a deficit in the supply-demand balance of 700,000 b/d in the second quarter assuming Middle East producers in the OPEC+ group stick with current plans formulated before the Ukraine crisis. Petrochemical producers could be hit hard as Russia was the world's largest naphtha exporter in January and February, accounting for a fifth of international seaborne exports, it said.

The US shale sector is unlikely to be able to provide a quick supply boost, the IEA added, as it raised its estimate of production growth from non-OPEC+ countries by just over 100,000 b/d for this year to 2.1 million b/d.

"Non-OPEC+ supply levers that can be immediately pulled as a rebalancing mechanism... are limited. US light tight oil theoretically has the potential to buffer a supply disruption, but given the current multitude of constraints facing the industry any response in less than four to six months would be considered lightning fast," the IEA said.

It added that under a "sustained supply shock scenario" US shale output could potentially grow by 500,000 b/d by year-end, but would run into severe cost inflation and infrastructure bottlenecks.

Falling stocks

The IEA said commercial oil stocks in OECD countries had already hit an eight-year low of 2.6 billion barrels in January and would likely be lower in February, adding that "IEA emergency stocks will provide a welcome buffer, and member countries stand ready to release more oil from strategic reserves if and when needed."

"We estimate that from April 3 million b/d of Russian oil output may be shut in as more buyers spurn cargos from the country. If this level of disruption is sustained, scheduled monthly OPEC+ increases from Saudi Arabia and other Middle East members along with non-OPEC+ gains driven by the US would leave world oil markets undersupplied in the second and third quarters," the IEA said.

"Although oil prices flirting with triple digits are expected to lead to some reduction in demand, our current balances (under this scenario) show a potential supply deficit of 700,000 b/d in Q2," it said.

The IEA's downward demand revision puts it at odds with OPEC's own monthly oil market report, released the day before, in which the organization maintained its projection prior to the invasion that demand this year will grow by 4.2 million b/d to average 100.9 million b/d, more than 1 million b/d higher than the IEA's new projection of 99.6 million b/d.

Within the overall demand picture, the IEA sees Russian oil product demand falling by over 300,000 b/d this year to 3.35 million b/d, including a 46% drop in jet fuel and kerosene demand to reflect the dire impact of the crisis on the country's aviation sector.