Rising Fuel Prices will Undermine Growth in Oil Demand – Moody’s
Rising fuel prices will undermine growth in oil demand Crude oil (Brent spot and West Texas Intermediate) prices have been volatile at $100-$120 per barrel (bbl) since the Russia-Ukraine conflict began in late February, Moody’s said in a global report.
The rating agency explained that several competing demand and supply forces are pulling at oil prices and their near-term trajectory will depend on how these forces evolve.
“We expect that high and volatile oil prices – and extremely high fuel prices over the summer of 2022 – will undermine growth in oil demand, reducing projected supply deficit and causing a decline in oil prices in 2022-23”.
Oil prices climbed steadily since pandemic-trough in April 2020, propelled by insufficient investment by the industry and slow recovery in oil supply amid fast recovery in demand for oil.
While oil prices surged well above the $50/bbl – $70/bbl, that analysts estimate supports profitable reinvestment by the industry, growth in capital investment and supply remains elusive, reflecting a fundamental change in capital allocation frameworks, a focus on shareholder returns and rising regulatory and financial risks managed by producers.
According to Moody’s report, demand for oil will start to weaken as prevailing high prices in combination with rising interest rates dampen economic growth.
Accordingly, the US Energy Information Administration (EIA) earlier this month reduced its 2022 global oil and fuel consumption forecast to 99.6 mbbld, down about 1 mbbld from its estimate at the start of the year.
Oil demand largely depends on consumption of fuels, such as gasoline and diesel. High frequency mobility data points to a broad decline in mobility trends across all major markets since the start of the Russia-Ukraine crisis.
At the same time, fuel prices are rising much faster than oil prices, driven by spreading physical shortages of fuels because of reduced supply from Russia and low inventories. Europe, which imports about 40% of its diesel from Russia, is especially exposed.
Rising demand for US fuel exports is pushing traded prices for diesel and gasoline to significant premiums over current oil prices, exacerbating pressure on consumers (see exhibit).
The conflict in Ukraine has amplified uncertainty about supply and will remain the source of heightened geopolitical risk premium and high volatility in oil prices this year and next. Russia is the second largest exporter of oil and the largest exporter of fuels to Europe.
The conflict has left oil markets more dependent than ever on policy levers, such as sanctions, embargos and other trade regulations.
The European Commission’s proposed plan to ban Russian oil imports by the end of this year, if implemented, will amplify the imbalances in the global oil market and cause sharply higher oil prices and shortages of petroleum fuels.
The plan, however, is stalled by resistance from several member states, including Hungary and Slovakia. These two countries have the highest risk exposures to the potential embargo on Russian oil because of their landlocked position and limited options for alternative supply to national refineries configured to process heavier Russian crudes.
So far, sanctions against Russia have increased the likelihood of a material loss of supply. New trade restrictions are forcing a hasty reordering of energy trade flows and a rebalancing of established regional pricing patterns.
At $100/bbl – $120/bbl, the oil market is likely pricing in a disruption to Russian export supply of about 1 million bbld in 2022 (about 1% of the projected demand).
“We expect that the release of strategic petroleum reserve by the US will provide around 1 million bbld of additional supply over May-October this year and therefore reduce pressure on rising oil prices during the summer season, while both supply and demand continue to adjust to the new trade order”.
Moody’s said should Russian export volumes fall by more than the expected 1 million bbld in 2022, and especially if such decline in supply were to exceed global spare production capacity, oil prices could rise sharply for an extended period of time.
Structural supply imbalance caused by insufficient investment may persist for years and will require a stronger response from producers.
In the near term, however, the global rating firm said it sees rising risks to demand that will cause lower oil prices by the end of 2022.
The Russia-Ukraine conflict remains a source of great uncertainty, but any additional destruction in supply and a spike in oil prices will ultimately accelerate a decline of oil demand. # Rising Fuel Prices will Undermine Growth in Oil Demand – Moody’s
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