MC Explains | OPEC cuts oil demand forecast, cites slowing economy. What does it mean for India?

Representativei image (Photographer: Andrey Rudakov/Bloomberg)

OPEC, or Organization of the Petroleum Exporting Countries, cut its forecast for global oil demand for 2022 and 2023 on Wednesday, citing challenges faced by the global economy.

In its monthly report, OPEC said oil demand will increase by 2.7 percent, or 2.64 million barrels per day (bpd) in 2022, compared to 3.1 million bpd in its previous forecast.

For 2023, the group expects oil demand to rise by 2.5 per cent, or 2.34 million bpd, lower than the earlier forecast of 2.7 million bpd. Even so, OPEC expects demand to exceed the pre-pandemic level in 2023.

Why is demand expected to slow? 

“Global economic growth has entered into a period of significant uncertainty and deteriorating macroeconomic conditions, amid intensifying challenges including high inflation levels, tightening monetary policies by major central banks, rising interest rates and persisting supply chain issues,” the group said.

OPEC also cited geopolitical risks and uncertainty around COVID-19 lockdowns for the lower oil demand forecast.

On its revised outlook, OPEC said extension of COVID-19 restrictions in some Chinese regions, economic challenges confronting the Organization for Economic Co-operation and Development and inflationary pressures in key economies have weighed on oil demand, especially in the second half of 2022.

Earlier in the month, OPEC and its allies, known as OPEC+, announced that they would cut oil supplies by nearly 2 million barrels per day to support weakening oil prices.

How did OPEC's latest forecast impact crude oil prices?  

OPEC’s weakening global demand outlook pulled oil prices down on Thursday morning.

On concerns about demand, US crude futures fell 7 cents to $87.20 per barrel at 0012 GMT on Thursday. Brent crude futures fell 1 cent to $92.44 per barrel.

Oil prices also slumped due to lower expectations by the US Energy Department for both production of and demand  for oil in the US and globally.

What are the macroeconomic factors indicating? 

The comments by OPEC on the global economy came a day after the International Monetary Fund (IMF) predicted that global growth will slow further in the next year.

In its World Economic Outlook, IMF said global economy growth will slow to 2.7% in 2023, 0.2 percentage point lower than its July forecast.

IMF said excluding the global financial crisis and the acute phase of the COVID-19 pandemic, this is the weakest growth profile since 2001.

Countries around the world—including advanced economies such as the US and the UK—are experiencing record-high inflation and confronting recession fears.

“The global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China,” IMF said.

The agency added that “the worst is yet to come, and for many people 2023 will feel like a recession.”

For India, IMF slashed its growth forecast to 6.8% for 2022, citing weaker-than-expected second-quarter growth and subdued external demand. India is expected to grow 6.1% in 2023, according to the report.

How would India be impacted by the lower oil demand forecast? 

Because India is a net importer of oil, domestic prices are primarily dictated by international markets.

Considering the low demand forecast by OPEC and high inflation in most countries, prices are expected to  tumble further.

A slump in oil prices would not only provide relief to consumers in India but also help the country in cutting its import bill.

Oil Marketing Companies (OMCs) would also benefit from a decline in oil prices and would be able to recoup the losses they incurred when prices had rocketed.

So this means cheaper fuel, doesn't it? 

Even though low demand seems like good news for India, it may not immediately translate into a reduction  of oil prices.

Fuel retailers in India kept prices unchanged for over five months (from November 2021 to March 2022) despite a steep rise in the crude oil price to control inflation in the country.

With a slump in prices, OMCs plan to recover their losses by not selling fuel at cheaper prices.

Minister of Petroleum and Natural Gas Hardeep Singh Puri said last month that retailers like Indian Oil Corporation and Bharat Petroleum Corporation are unlikely to cut fuel prices as they had maintained prices at lower levels earlier.

He added that oil companies needed more time to recover their losses.

Additionally, the weakening rupee, which is hovering around an all-time low against the US dollar, is also a hindrance to reduction of oil prices.

The weakness in rupee means import bills would continue to be high for refiners, preventing OMCs from reducing prices.