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Rising fuel prices will stifle oil demand growth – Moody’s

THE rise of oil demand will be hampered by rising fuel prices. Since the Russia-Ukraine crisis began in late February, crude oil prices (Brent spot and West Texas Intermediate) have remained volatile at $100-$120 per barrel (bbl), according to Moody’s.

Several opposing demand and supply dynamics are pushing at oil prices, according to the rating agency, and their near-term direction will be determined by 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”.

Since the pandemic’s trough in April 2020, oil prices have steadily risen, fueled by a lack of industrial investment and a delayed rebound in oil supply despite a rapid increase in demand.

While oil prices have risen well above the $50–$70 per barrel range that analysts believe will support profitable reinvestment, growth in capital investment and supply has remained elusive, reflecting a fundamental shift in capital allocation frameworks, a focus on shareholder returns, and rising regulatory and financial risks managed by producers.

As a result, the US Energy Information Administration (EIA) cut its worldwide oil and fuel consumption forecast for 2022 to 99.6 million barrels per day, down by roughly 1 million barrels per day from its estimate at the start of the year.

Fuel usage, such as gasoline and diesel, has a big impact on oil demand. Since the start of the Russia-Ukraine crisis, high frequency mobility data shows a general fall in mobility trends across all major markets.

Simultaneously, fuel costs are rising far faster than oil prices, owing to widespread physical fuel shortages caused by reduced Russian supplies and low inventories. Europe, which imports roughly 40% of its diesel from Russia, is particularly vulnerable.

Rising demand for US fuel exports is driving up traded prices for diesel and gasoline, putting additional pressure on consumers.

The conflict in Ukraine has increased supply uncertainty and will continue to be a source of elevated geopolitical risk premiums and high volatility in oil prices this year and next. Russia is the world’s second-biggest oil exporter and Europe’s top fuel exporter.

The conflict has made policy levers like sanctions, embargos, and other trade controls more important than ever.

If adopted, the European Commission’s proposed plan to ban Russian oil imports by the end of the year will exacerbate global oil market imbalances, resulting in dramatically higher oil prices and petroleum fuel shortages.

Several member states, particularly Hungary and Slovakia, have expressed opposition to the initiative. Because of their landlocked situation and few alternatives for alternative supply to national refineries equipped to process heavier Russian crudes, these two countries are the most vulnerable to a prospective Russian oil embargo.

So far, sanctions against Russia have increased the risk of a significant supply disruption. New trade limitations are requiring a fast reorganization of energy trade flows and a rebalance of regional pricing patterns.

The oil market is likely pricing in a 1 million bbld disruption in Russian export supply in 2022 at $100 – $120 a barrel (about 1 percent 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”.

Oil prices might climb sharply for an extended period of time, according to Moody’s, if Russian export volumes fall by more than the predicted 1 million bbld in 2022, and especially if such a drop in supply exceeds global spare production capacity.

Insufficient investment may develop a structural supply imbalance that will necessitate a larger reaction from producers.

However, in the near future, the global rating business predicts increased demand risks, which will result in lower oil prices by the end of 2022.

The Russia-Ukraine conflict continues to be a source of tremendous uncertainty, but any further supply disruptions and an increase in oil prices will hasten the drop in oil demand.

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