Oil Markets Affected by Supply Squeeze and Fears of Recession

An aerial view shows oil tanks of Transneft oil pipeline operator at the crude oil terminal Kozmino on the shore of Nakhodka Bay near the port city of Nakhodka, Russia, on June 13, 2022. (Tatiana Meel/Reuters)

Global oil markets are in a tough spot as recession fears and worries about supply push the sector into “walking a tightrope,” an International Energy Agency (IEA) report warned.

Though a “resilient Russian supply” and weaker-than-expected oil demand growth in advanced economies have “loosened headline balances,” price tensions persist and refinery margins remain extreme, said an overview of the report published in July.

Global oil supply is projected to grow by around 1.8 million barrels per day through December. However, the report states there are short-term risks, including the potential loss of supply from countries like Libya and Kazakhstan.

Organization for Economic Co-operation and Development (OECD) stocks are almost 300 million barrels below their 5-year average. OECD is an intergovernmental organization with 38 member countries based out of France.

In China, refineries have reduced operations due to COVID-19 lockdowns and reduced demand. Global inventories are “critically low.” When the EU embargo on Russian oil comes into effect, the oil market could tighten once more, the report cautions.

While the supply situation looks tight, the IEA is expecting oil demand to expand by 1.7 million barrels per day in 2022 and by 2.1 million barrels per day in 2023. Meanwhile, the World Bank has lowered its global GDP growth expectations for 2022 and the International Monetary Fund (IMF) has warned about a potential recession next year.

“Rarely has the outlook for oil markets been more uncertain. A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side,” according to the report.

In June, global oil output rose by 690,000 barrels per day to 99.5 million barrels per day due to higher oil output from the United States and Canada as well as Russia defying its sanctions.

Other Market Predictions

The IEA report comes as the OPEC nations have been struggling to keep pace with demand. Though the organization produced more oil than expected in the second quarter of 2022, it failed to reach the expected target in the first quarter.

OPEC is projecting an increase of 3.36 million barrels per day of oil demand this year, with the organization having to produce 1.1 million additional barrels of oil per day. However, spare capacity is an issue as some experts do not see big-time players like Saudi Arabia being able to increase oil output by a significant margin.

“The oil market is being pulled in two directions with exceedingly tight physical fundamentals set against forward-looking demand concerns and signs of price-induced demand destruction,” analysts at EBW Analytics said in a note, according to Reuters.

A stronger U.S. dollar is adding downward pressure on oil as the situation makes oil pricier for buyers who use other currencies.