High oil prices tempering outlook but supply-side constraints more pressing: panel

High oil prices and soaring inflation are tempering but not derailing the global oil demand outlook this year, though markets should be more focused on supply-side constraints in the near term, speakers at the Global Executive Petroleum & Energy Conference from S&P Global said June 7.

Although record pump prices and spiraling living costs were squeezing some demand for road and air travel, a seasonal surge in pent-up oil demand over the summer as the world reopens will likely keep oil demand growth robust and offset macro headwinds from inflation, according to Ole Hansen, the head of commodity strategy at Saxo Bank.

"We are not going to see much demand destruction anytime soon because there is a lot of [demand] savings pent up over the past few years," Hansen told the event.

"All major sectors are being affected by prices and the scarcity of supply [but] I think we need to get on the other end of the summer before we start to see some demand destruction."

Platts Analytics June 3 raised its forecasts for 2022 global oil demand growth by 200,000 b/d, citing better than expected recovery in Southeast Asia and Western Europe as well as easing restrictions and lockdowns in China.

Platts Analytics expects global oil demand to expand by 2.8 million b/d in 2022 and by 2.5 million b/d in 2023. The estimates assume an annual average Dated Brent price of $104/b for 2022 and 90/b for 2023.

"Oil demand recovery would be tempered by a sub-par recovery in Chinese demand, weakening in global growth momentum or prices rebound above our current forecast," Platts Analytics said in its June 3 note.

Hansen said, while Brent futures prices hover around $120/b, the risk premium for oil has transferred from crude to the refining product markets, with record pump prices in many countries and historically high refining margins.

"We need to get the [gasoline and diesel] prices to levels where demand starts to come down, I think we are close to reaching that level," he said.

Supply constraints

But although demand-side concerns continue to weigh on market sentiment, Hensen said marketwatchers should watch for supply constraints due to producers struggling to rapidly retool and ramp up capacity slower in the wake of the pandemic, a lack of appetite for new upstream oil investments due to heightened climate concerns, and growing uncertainty over future oil demand scenarios.

"The additional worry that we have is simply that the old saying -- that the best cure for a high price is a high price -- is not working that well because that is only part of the equation ... we are not seeing that pick-up in supply that we need."

Speaking on the same panel, the head of the International Energy Agency's oil market division Toril Bosoni, also sounded a warning that supply-side constraints could be more supportive for oil price in the near-term than linger demand weakness.

"High prices and demand destruction is very much on the minds of producers. We are seeing an increase in our OECD member countries focus on additional supplies to the market [but] we are not getting the investment either on oil and gas side or on clean energy technology that can offset it," Boril said.

Referring to the loss of Russian oil supplies to the market as Western sanctions on Moscow ramp up, Toril said the IEA expects alternative supplies outside OPEC+ to come from the US, Brazil, and Canada in the near-term. She said the IEA expected US shale production growth alone to add some 800,000 b/d this year and higher prices incentivize more drilling.

The move by OPEC+ producers last week to raise their production quotas last week did little to help soothe rising oil prices largely due to concerns over the cartel's ability to pump significantly higher volumes and the group's fast-shrinking spare capacity.

Part of OPEC+'s move to return production faster to the market is also motivated by a desire to protect the market against demand destruction, said Carole Nakhle, CEO of consultants Crystol Energy.

"Do not be fooled by this statement about stabilizing the market that OPEC uses as the core of its mission. Their objective is to maximize revenues for the long term...so their main objective for the long term is safeguarding demand," Nakhle told the event.