Unpredictable Energy Markets Soften Global Economic Outlook

Volatility in global energy markets has business and government economists wondering what to expect from supply and demand for the remainder of the year and beyond.

The Energy Information Administration (EIA) at the U.S. Department of Energy released its July Short-Term Energy Outlook this week. In the first paragraph it noted the report “is subject to heightened uncertainty” about energy supplies from Russia, the U.S., and OPEC.

Also, the International Energy Agency (IEA) stated in its report this week: “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.”

Higher prices and a deteriorating economic environment have started to take their toll on oil demand, but strong power generation use and a recovery in China are providing a partial offset, IEA stated. Still, IEA projects demand to increase by 1.7 million barrels per day (b/d) in 2022, reaching 99.2 million b/d.

“World oil supply jumped by 690,000 b/d to 99.5 million b/d in June as resilient Russian production and higher output from the US and Canada more than offset steep maintenance-related losses from Kazakhstan,” according to IEA. “Production is expected to rise by 1.8 million b/d by end-year to reach 101.3 million b/d. Global oil supply is set to average 100.1 million b/d in 2022 before hitting an annual record of 101.1 million b/d in 2023.”

IEA reports refinery throughputs rose by 500,000 b/d in June, to 79.2 million b/d, 1.2 million b/d above a year ago. A number of outages and tight spare capacity outside of China meant that product supply failed to keep up with the seasonal increase in demand.

“Russian oil exports in June fell by 250,000 b/d month-to-month to 7.4 million b/d, the lowest since August 2021,” IEA reported. “This time, the decline was led by crude oil, while product shipments were relatively stable at 2.4 million b/d. Meanwhile, export revenues increased by $700 million month-to-month on higher oil prices, to $20.4 billion, 40 percent above last year’s average.”

Benchmark crude oil futures plunged by more than $20 per barrel in June as a worsening economic outlook fueled a broad market sell-off.  Brent was below $100 while WTI traded at around $96. Price premiums for physical barrels widened on rising seasonal demand for both crude and products while supply remains constrained.

EIA said U.S. regular gasoline retail prices averaged $4.11 and diesel averaged $4.91 in the first half of 2022.

Natural gas spot price at Henry Hub averaged $6.07 per million British thermal units (MMBtu) in the first half of 2022. The average price increased in each month from January through May, when it reached $8.14/MMBtu before declining to $7.70/MMBtu in June. EIA expects the Henry Hub spot price will average $5.97/MMBtu in the second half of this year.

Alex Mills is the former President of the Texas Alliance of Energy Producers.