Oil: The increase in global supply is fueling the fall in barrel prices

The price of a barrel of crude oil has fallen by around $30 since its peak in June, the International Energy Agency (IEA) noted in its monthly report released on Thursday. The main reason for this is increased supply. In July alone, it rose by 1.4 million barrels per day (mb/d) to an average of 100.5 mb/d, the highest since January 2020, before the pandemic began.

However, demand remains strong. The agency revised up its 2022 estimate by 380,000 barrels per day to 99.7 mb/d. It is benefiting from new needs arising in particular from the use of oil as a fuel in industry or to generate electricity, replacing natural gas, which is still reaching record levels. ” As several regions experience scorching heat waves, the latest data confirms a rise in the use of oil for power generation, particularly in Europe and the Middle East, but also across Asia. », says the IEA. This fuel change ” also takes place in European industry, including refineries »note the authors of the report.

However, this average demand is masked ” relative weaknesses in other sectors » and a slowdown in its growth, which will fall from 5.1 mb/d at the start of the year to less than 100,000 barrels per day by the final quarter of 2022, the agency notes.

End of maintenance work

In turn, global supply benefited from the end of certain maintenance operations in the North Sea, Canada and Kazakhstan. The Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) increased their production only slightly. Russia, one of the top OPEC countries, did not experience a slump in its exports after invading Ukraine. In its previous report, the IEA even expected a decline of 2 mbd. Today she finds it” due to the limited impact of US and EU sanctions so far », Russian exports fell in July from 8 mb/d at the beginning of the year to just 7.4 mb/d.

In reality, the Russian oil supply has only changed its destination. In June, says the IEA, ” Crude oil exports to China, which totaled 2.1 mb/d, exceeded the volumes shipped to EU countries for the first time at 1.8 mb/d ». The movement is likely to intensify in the coming months, as is the strict application of the European embargo on Russian crude.

As a result, Russia became ” China’s main source of crude oil in May and June », says the agency. For example, the People’s Republic accounted for 35% of Russia’s crude oil exports, while Russia accounted for about 20% of China’s crude oil imports. Meanwhile, Russian exports to India hit a new record high of 975,000 bpd in July, according to IEA data.

Rise in industrial OECD stocks

At this point in time, the IEA is even counting on it ” Global oil supply needs to increase by another 1 mb/d by the end of the year ». A phenomenon that manifests itself in the form of an increase in trading shares of companies in OECD countries. In addition, the agency shows in its report a close correlation between the level of these commercial stocks and the price of Brent: when stocks rise, the price of Brent falls (see grafic).

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The IEA thus confirms the validity of the decision by the United States and all OECD countries to use their strategic stockpiles (240 million barrels, of which 180 million barrels for the United States alone) to supply the market regularly in recent months. It helped drive down prices, which had hit nearly $130 a barrel in March after the Russian invasion of Ukraine. This Thursday, the price of a barrel of Brent fluctuated around $98 while that of WTI fluctuated around $92.5.

But this fall in prices and this increase in commercial inventories anticipate the risk of a recession, particularly in Europe. In its latest report on the outlook for the global economy, the International Monetary Fund (IMF) reduced its growth forecasts to 3.2% (-0.4 points) in 2022 and 2.9% (-0.7 points) in 2023 revised downwards. So a recession is particularly likely to hit Europe, which is facing an energy crisis that is weighing on the European economy. In its report, the IEA also recalls that the consumer confidence index in the euro zone hit an all-time low in July.